Harry Winston Diamond Corporation Reports Fiscal 2013 Second Quarter Results (1 of 2)
TORONTO, September 6, 2012 /PRNewswire/ –
Harry Winston Diamond Corporation (TSX: HW, NYSE:HWD) (the “Company”) today announced
its second quarter Fiscal 2013 results for the quarter ending July 31, 2012.
Robert Gannicott, Chairman and Chief Executive Officer stated, “This quarter has seen
transaction numbers and margins grow in our luxury goods segment even as we have withheld
rough diamonds, from a soft diamond market, rather than sell at depressed prices.”
Second Quarter Highlights:
- Consolidated sales decreased 20% to $176.9 million for the second quarter
compared to $222.4 million for the comparable quarter of the prior year.
- Operating profit was $16.4 million compared to $23.1 million in the comparable
quarter of the prior year.
- EBITDA decreased 24% to $33.4 million compared to $43.8 million in the
comparable quarter of the prior year.
- For the mining segment rough diamond sales for the quarter decreased 31% to
$61.5 million, versus $89.6 million in the comparable quarter of the prior year.
- The decrease in sales resulted from a combination of a 24% decrease in volume
of carats sold during the quarter and a 10% decrease in achieved rough diamond prices.
- The 24% decrease in the quantity of carats sold was primarily the result
of the Company's decision to hold some inventory until stability returns to the
rough diamond market. Had the Company sold only the last production shipped for
the second quarter, the estimated achieved price would have been approximately
$104 per carat based on the prices achieved in the March/April 2012 sale adjusted
down by 14% to reflect current market conditions.
- The Company sold approximately 0.43 million carats for an average price of
$142 per carat compared to approximately 0.57 million carats for an average price
per carat of $157 in the comparable quarter of the prior year. The 10% decrease in
the Company's achieved average rough diamond prices in the second quarter resulted
from a decrease in the market price for rough diamonds from the peak achieved in
July 2011, partially offset by the sale of the higher priced goods held back by
the Company in the first quarter of fiscal 2013 due to an observed imbalance in
the rough and polished diamond prices for these goods during that period.
- The Company had 0.7 million carats of rough diamond inventory with an
estimated current market value of approximately $90 million at July 31, 2012, of which
approximately $65 million represents inventory available for sale.
- Rough diamond production for the calendar quarter ended July 31, 2012 was 0.72
million carats (40% basis), which was consistent with the comparable period of the
prior year.
- Luxury brand segment sales decreased 13% (11% at constant exchange rates) to
$115.4 million compared to $132.8 million in the comparable quarter of the prior year.
- Excluding high-value transactions from both periods, sales increased 25% in
the second quarter versus the comparable quarter in the prior year.
- Operating profit for the luxury brand segment increased 16% to $8.0 million in
the second quarter compared to $6.9 million in the comparable quarter of the prior
year.
- The increase in operating profit was primarily driven by positive product mix
and a greater portion of high-value transactions in the comparable quarter of the
prior year that generated lower-than-average gross margins.
- On August 30, 2012, the luxury brand segment refinanced its senior secured
revolving credit facility by entering into a new secured five-year credit agreement
with a consortium of banks led by Standard Chartered Bank establishing a $260 million
facility for revolving credit loans. The facility has a maturity date of August 30,
2017.
- Consolidated net profit attributable to shareholders for the second quarter
was $4.8 million or $0.06 per share compared to net profit attributable to
shareholders of $10.0
- million or $0.12 per share in the comparable quarter of the prior year.
Fiscal 2013 Second Quarter Financial Summary
(US$ in millions except Earnings per Share amounts)
Three months Three months Six months Six months
ended ended ended ended
July 31, 2012 July 31, 2011 July 31, 2012 July 31, 2011
Sales $176.9 $222.4 $369.4 $366.3
- Mining Segment 61.5 89.6 150.5 151.6
- Luxury Brand Segment 115.4 132.8 218.9 214.7
Operating profit (loss) 16.4 23.1 35.0 27.8
- Mining Segment 11.7 18.5 28.1 22.5
- Luxury Brand Segment 8.0 6.9 15.1 11.1
- Corporate Segment (3.3) (2.3) (8.2) (5.8)
Net profit attributable to
shareholders 4.8 10.0 16.4 13.6
Earnings per share $0.06 $0.12 $0.19 $0.16
Complete financial statements, MD&A and a discussion of risk factors are included in
the accompanying release.
Outlook
The Company issued an updated life-of-mine plan in August for the Diavik Diamond Mine
with a $2.6 billion net asset value on a 100% basis based on reserves and resources
including A-21.
The plan for calendar 2012 Diavik Diamond Mine production remains at approximately 8
million carats (100% basis).
Looking beyond calendar 2012, the objective is to fully utilize processing capacity
with a combination of production from the underground portions of A-154 South, A-154 North
and A-418 supplemented by the A-21 open pit. The A-21 pre-feasibility study currently
being undertaken assumes that the A-21 pipe will be mined with the open pit methods used
for the other pipes. A dike would be constructed similar to the two other pits but smaller
in size. Detailed plans are still being refined and optimized and no underground mining is
being planned. The capital expenditures are estimated to be in the region of $500 million
(100% basis) at an assumed average Canadian/US dollar exchange rate of $1.00.
The Company expects the trend of wealth creation in emerging markets combined with
increasing tourism to remain key drivers of increasing demand for luxury jewelry and watch
products. Over the long term, consumer brand loyalty for luxury products is expected to
remain strong. The Company is well positioned moving into the second half of the year,
supported by a strong advertising campaign and product assortment, and its global
distribution network in prime locations. A new directly operated salon was opened in the
Harrods department store in London, England, in August 2012 and a directly operated salon
is expected to be opened early next year in Geneva, Switzerland. A new licensed salon was
opened in May in Moscow, Russia. In addition, a new licensed salon is expected to be
opened in Kuwait City, Kuwait in late 2013.
The Company also plans to expand by 24 wholesale watch doors to 220 doors by the end
of fiscal 2013.
Conference Call and Webcast
Beginning at 8:30AM (ET) on Thursday, September 6th, the Company will host a
conference call for analysts, investors and other interested parties. Listeners may access
a live broadcast of the conference call on the Company’s investor relations web site at
http://investor.harrywinston.com or by dialing 866-825-3354 within North America or
617-213-8063 from international locations and entering passcode 42016423.
An online archive of the broadcast will be available by accessing the Company’s
investor relations web site at http://investor.harrywinston.com. A telephone replay of
the call will be available one hour after the call through 11:00PM (ET), Thursday,
September 20, 2012 by dialing 888-286-8010 within North America or 617-801-6888 from
international locations and entering passcode 24805897.
About Harry Winston Diamond Corporation
Harry Winston Diamond Corporation is a diamond enterprise with premium assets in the
mining and retail segments of the diamond industry. Harry Winston supplies rough diamonds
to the global market from its 40 percent ownership interest in the Diavik Diamond Mine.
The Company’s luxury brand segment is a premier diamond jeweler and luxury timepiece
retailer with salons in key locations, including New York, Paris, London, Beijing,
Shanghai, Hong Kong, Singapore, Tokyo and Beverly Hills.
The Company focuses on the two most profitable segments of the diamond industry,
mining and retail, in which its expertise creates shareholder value. This unique business
model provides key competitive advantages; rough diamond sales and polished diamond
purchases provide market intelligence that enhances the Company’s overall performance.
For more information, please visit http://www.harrywinston.com or for investor
information, visit http://investor.harrywinston.com.
Highlights
(ALL FIGURES ARE IN UNITED STATES DOLLARS UNLESS OTHERWISE INDICATED)
Consolidated sales were $176.9 million for the second quarter compared to $222.4
million for the comparable quarter of the prior year, resulting in an operating profit of
$16.4 million compared to $23.1 million in the comparable quarter of the prior year. Gross
margin of $72.2 million was consistent with the comparable quarter of the prior year.
Consolidated EBITDA was $33.4 million compared to $43.8 million in the comparable quarter
of the prior year. The Company had 0.7 million carats of rough diamond inventory with at
an estimated current market value of approximately $90 million at July 31, 2012, of which
approximately $65 million represents inventory available for sale.
The mining segment recorded sales of $61.5 million, a 31% decrease from $89.6 million
in the comparable quarter of the prior year. The decrease in sales resulted from a
combination of a 24% decrease in volume of carats sold during the quarter and a 10%
decrease in achieved rough diamond prices. Rough diamond production during the second
calendar quarter was consistent with the comparable period of the prior year. The mining
segment recorded operating profit of $11.7 million compared to $18.5 million in the
comparable quarter of the prior year. EBITDA for the mining segment was $24.9 million
compared to $36.0 million in the comparable quarter of the prior year.
The luxury brand segment recorded sales of $115.4 million, a decrease of 13% from
sales of $132.8 million in the comparable quarter of the prior year (a decrease of 11% at
constant exchange rates). The second quarter of the prior year included a greater portion
of high-value transactions compared to the current quarter that generated
lower-than-average gross margins. Operating profit was $8.0 million for the quarter
compared to $6.9 million in the same quarter of the prior year. EBITDA for the luxury
brand segment was $11.7 million compared to $10.0 million in the comparable quarter of the
prior year.
The corporate segment recorded selling, general and administrative expenses of $3.4
million compared to $2.3 million in the comparable quarter of the prior year.
The Company recorded a consolidated net profit attributable to shareholders of $4.8
million or $0.06 per share for the quarter, compared to a net profit attributable to
shareholders of $10.0 million or $0.12 per share in the second quarter of the prior year.
Management's Discussion and Analysis
PREPARED AS OF SEPTEMBER 5, 2012 (ALL FIGURES ARE IN UNITED STATES DOLLARS
UNLESS OTHERWISE INDICATED)
The following is management’s discussion and analysis (“MD&A”) of the results of
operations for Harry Winston Diamond Corporation (“Harry Winston Diamond Corporation”, or
the “Company”) for the three and six months ended July 31, 2012, and its financial
position as at July 31, 2012. This MD&A is based on the Company’s unaudited interim
condensed consolidated financial statements prepared in accordance with International
Financial Reporting Standards (“IFRS”) and should be read in conjunction with the
unaudited interim condensed consolidated financial statements and notes thereto for the
three and six months ended July 31, 2012 and the audited consolidated financial statements
of the Company and notes thereto for the year ended January 31, 2012. Unless otherwise
specified, all financial information is presented in United States dollars. Unless
otherwise indicated, all references to “second quarter” refer to the three months ended
July 31. Unless otherwise indicated, references to “international” for the luxury brand
segment refer to Europe and Asia.
Certain information included in this MD&A may constitute forward-looking information
within the meaning of Canadian and United States securities laws. In some cases,
forward-looking information can be identified by the use of terms such as “may”, “will”,
“should”, “expect”, “plan”, “anticipate”, “foresee”, “appears”, “believe”, “intend”,
“estimate”, “predict”, “potential”, “continue”, “objective”, “modeled”, “hope” or other
similar expressions concerning matters that are not historical facts. Forward-looking
information may relate to management’s future outlook and anticipated events or results,
and may include statements or information regarding plans, timelines and targets for
construction, mining, development, production and exploration activities at the Diavik
Diamond Mine, future mining and processing at the Diavik Diamond Mine, projected capital
expenditure requirements and the funding thereof, liquidity and working capital
requirements and sources, estimated reserves and resources at, and production from, the
Diavik Diamond Mine, the number and timing of expected rough diamond sales, the demand for
rough diamonds, expected diamond prices and expectations concerning the diamond industry
and the demand for luxury goods, expected cost of sales and gross margin trends in the
mining segment, targets for compound annual growth rates of sales and operating income in
the luxury brand segment, plans for expansion of the luxury brand retail salon network,
and expected sales trends and market conditions in the luxury brand segment. Actual
results may vary from the forward-looking information. See “Risks and Uncertainties” on
page 18 for material risk factors that could cause actual results to differ materially
from the forward-looking information.
Forward-looking information is based on certain factors and assumptions regarding,
among other things, mining, production, construction and exploration activities at the
Diavik Diamond Mine, world and US economic conditions, and the worldwide demand for luxury
goods. Specifically, in making statements regarding expected diamond prices and
expectations concerning the diamond industry and expected sales trends and market
conditions in the luxury brand segment, the Company has made assumptions regarding, among
other things, the state of world and US economic conditions, worldwide diamond production
levels, and demand for luxury goods. While the Company considers these assumptions to be
reasonable based on the information currently available to it, they may prove to be
incorrect. See “Risks and Uncertainties” on page 18.
Forward-looking information is subject to certain factors, including risks and
uncertainties, which could cause actual results to differ materially from what we
currently expect. These factors include, among other things, the uncertain nature of
mining activities, including risks associated with underground construction and mining
operations, risks associated with joint venture operations, including risks associated
with the inability to control the timing and scope of future capital expenditures, and
risks of changes to the mine plan for the Diavik Diamond Mine, risks associated with the
remote location of and harsh climate at the Diavik Diamond Mine site, risks resulting from
the Eurozone financial crisis, risks associated with regulatory requirements, fluctuations
in diamond prices and changes in US and world economic conditions, the risk of
fluctuations in the Canadian/US dollar exchange rate, cash flow and liquidity risks, the
risks relating to the Company’s expansion strategy and of competition in the luxury
jewelry business as well as changes in demand for high-end luxury goods. Please see page
18 of this Interim Report, as well as the Company’s current Annual Information Form,
available at http://www.sedar.com, for a discussion of these and other risks and
uncertainties involved in the Company’s operations.
Readers are cautioned not to place undue importance on forward-looking information,
which speaks only as of the date of this MD&A, and should not rely upon this information
as of any other date. Due to assumptions, risks and uncertainties, including the
assumptions, risks and uncertainties identified above and elsewhere in this MD&A, actual
events may differ materially from current expectations. The Company uses forward-looking
statements because it believes such statements provide useful information with respect to
the expected future operations and financial performance of the Company, and cautions
readers that the information may not be appropriate for other purposes. While the Company
may elect to, it is under no obligation and does not undertake to update or revise any
forward-looking information, whether as a result of new information, future events or
otherwise at any particular time, except as required by law. Additional information
concerning factors that may cause actual results to materially differ from those in such
forward-looking statements is contained in the Company’s filings with Canadian and United
States securities regulatory authorities and can be found at http://www.sedar.com and
http://www.sec.gov, respectively.
Summary Discussion
Harry Winston Diamond Corporation is a diamond enterprise with premium assets in the
mining and retailing segments of the diamond industry. The Company supplies rough diamonds
to the global market from its 40% ownership interest in the Diavik Diamond Mine, located
in Canada’s Northwest Territories. The Company’s luxury brand segment is a premier diamond
jeweler and luxury timepiece retailer with salons in key locations including New York,
Paris, London, Beijing, Shanghai, Tokyo, Hong Kong and Beverly Hills.
The Company’s mining asset is an ownership interest in the Diavik group of mineral
claims. The Diavik Joint Venture (the “Joint Venture”) is an unincorporated joint
arrangement between Diavik Diamond Mines Inc. (“DDMI”) (60%) and Harry
Winston Diamond Limited Partnership (“HWDLP”) (40%) where HWDLP holds an undivided 40%
ownership interest in the assets, liabilities and expenses of the Diavik Diamond Mine.
DDMI is the operator of the Diavik Diamond Mine. DDMI and HWDLP are headquartered in
Yellowknife, Canada. DDMI is a wholly owned subsidiary of Rio Tinto plc of London,
England.
Market Commentary
The Diamond Market
During the second quarter, rough diamond prices declined due to three factors: the
buildup of stock in the cutting and polishing centres; increasingly tight liquidity due to
both continued economic instability in Europe and the impact of the significant weakening
of the Rupee versus the US dollar on credit availability in India; and challenging retail
conditions in India and China. Conversely, the US and Japanese retail markets continue to
perform well despite softer conditions in China. The mood within the diamond market
remains cautious but it is hoped that the Hong Kong International Jewellery Show will
bring more positive movement in retail diamond demand as the markets restock before the
Asian wedding and year-end holiday seasons.
The Luxury Jewelry and Timepiece Market
Luxury consumers have become increasingly cautious as a result of the uncertainty in
the global economy and volatility in the equity markets and overall demand for luxury
products has slowed as a result of the continued economic instability in Europe and the
lower economic growth in export-driven emerging markets. However luxury retailers with
strong global distribution networks are benefitting from the trend of increased tourism by
wealthy consumers from emerging markets, which continues to be a major factor supporting
demand for luxury products (the majority of luxury goods purchased by Chinese nationals
are purchased while abroad). In addition the market is benefiting from the continued
economic recovery in the US while the Japanese market has experienced a strong increase in
demand for luxury products compared with the comparable period of the prior year, which
was negatively impacted by the earthquake and tsunami.
Condensed Consolidated Financial Results
The following is a summary of the Company’s consolidated quarterly results for the
eight quarters ended July 31, 2012 following the basis of presentation utilized in its
IFRS financial statements:
(expressed in thousands of United States dollars except per share
amounts and where otherwise noted)
(quarterly results are unaudited)
2013 2013 2012 2012 2012
Q2 Q1 Q4 Q3 Q2
Sales $ 176,897 $ 192,461 $ 216,017 $ 119,716 $ 222,378
Cost of sales 104,694 119,134 129,807 75,524 150,177
Gross margin 72,203 73,327 86,210 44,192 72,201
Gross margin (%) 40.8% 38.1% 39.9% 36.9% 32.5%
Selling, general and
administrative expenses 55,819 54,669 55,500 46,155 49,101
Operating profit (loss) 16,384 18,658 30,710 (1,963) 23,100
Finance expenses (4,028) (3,880) (3,481) (4,040) (5,183)
Exploration costs (568) (254) (177) (600) (781)
Finance and other
income 90 65 81 164 83
Foreign exchange
gain (loss) 153 (364) 458 436 288
Profit (loss) before
income taxes 12,031 14,225 27,591 (6,003) 17,507
Income tax expense
(recovery) 7,278 2,615 11,001 (1,272) 7,519
Net profit (loss) $ 4,753 $ 11,610 $ 16,590 $ (4,731) $ 9,988
Attributable to
shareholders $ 4,755 $ 11,610 $ 16,602 $ (4,728) $ 9,986
Attributable to non-
controlling interest (2) - (12) (3) 2
Basic earnings (loss)
per share $ 0.06 $ 0.14 $ 0.20 $ (0.06) $ 0.12
Diluted earnings (loss)
per share $ 0.06 $ 0.14 $ 0.19 $ (0.06) $ 0.12
Cash dividends
declared per share $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
Total assets (i) $ 1,660 $ 1,716 $ 1,637 $ 1,656 $ 1,671
Total long-term
liabilities (i) $ 461 $ 472 $ 670 $ 661 $ 633
Operating profit (loss) $ 16,384 $ 18,658 $ 30,710 $ (1,963) $ 23,100
Depreciation and
amortization (ii) 16,980 25,546 27,512 23,121 20,716
EBITDA (iii) $ 33,364 $ 44,204 $ 58,222 $ 21,158 $ 43,816
TABLE CONT’D
Six Six
months months
ended ended
2012 2011 2011 July 31, July 31,
Q1 Q4 Q3 2012 2011
Sales $ 143,932 $ 215,358 $ 140,877 $ 369,358 $ 366,310
Cost of sales 96,452 141,391 84,765 223,828 246,629
Gross margin 47,480 73,967 56,112 145,530 119,681
Gross margin (%) 33.0% 34.3% 39.8% 39.4% 32.7%
Selling, general and
administrative expenses 42,795 52,722 41,282 110,488 91,896
Operating profit (loss) 4,685 21,245 14,830 35,042 27,785
Finance expenses (3,983) (3,727) (3,835) (7,908) (9,166)
Exploration costs (212) (351) (212) (822) (993)
Finance and other
income 258 278 69 155 341
Foreign exchange
gain (loss) (177) 1,392 135 (211) 111
Profit (loss) before
income taxes 571 18,837 10,987 26,256 18,078
Income tax expense
(recovery) (3,027) 5,137 (2,410) 9,893 4,492
Net profit (loss) $ 3,598 $ 13,700 $ 13,397 $ 16,363 $ 13,586
Attributable to
shareholders $ 3,596 $ 13,693 $ 12,657 $ 16,365 $ 13,582
Attributable to non-
controlling interest 2 7 740 (2) 4
Basic earnings (loss)
per share $ 0.04 $ 0.16 $ 0.15 $ 0.19 $ 0.16
Diluted earnings (loss)
per share $ 0.04 $ 0.16 $ 0.15 $ 0.19 $ 0.16
Cash dividends
declared per share $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
Total assets (i) $ 1,671 $ 1,609 $ 1,584 $ 1,660 $ 1,671
Total long-term
liabilities (i) $ 613 $ 603 $ 596 $ 461 $ 633
Operating profit (loss) $ 4,685 $ 21,245 $ 14,830 $ 35,042 $ 27,785
Depreciation and
amortization (ii) 20,291 24,635 18,657 42,527 41,007
EBITDA (iii) $ 24,976 $ 45,880 $ 33,487 $ 77,569 $ 68,792
(i) Total assets and total long-term liabilities are expressed in millions of
United States dollars.
(ii) Depreciation and amortization included in cost of sales and selling, general
and administrative expenses.
(iii) Earnings before interest, taxes, depreciation and amortization ("EBITDA"). See
"Non-IFRS Measure" on page 17.
The comparability of quarter-over-quarter results is impacted by seasonality
for both the mining and luxury brand segments. Harry Winston
Diamond Corporation expects that the quarterly results for its mining segment
will continue to fluctuate depending on the seasonality of production
at the Diavik Diamond Mine, the number of sales events conducted during the
quarter, and the volume, size and quality distribution of rough
diamonds delivered from the Diavik Diamond Mine in each quarter. The quarterly
results for the luxury brand segment are also seasonal, with
generally higher sales during the fourth quarter due to the holiday season.
See "Segmented Analysis" on page 8 for additional information.
Three Months Ended July 31, 2012 Compared to Three Months Ended July 31, 2011
CONSOLIDATED NET PROFIT ATTRIBUTABLE TO SHAREHOLDERS
The Company recorded a second quarter consolidated net profit attributable to
shareholders of $4.8 million or $0.06 per share compared to a net profit attributable to
shareholders of $10.0 million or $0.12 per share in the second quarter of the prior year.
CONSOLIDATED SALES
Sales for the second quarter totalled $176.9 million, consisting of rough diamond
sales of $61.5 million and luxury brand segment sales of $115.4 million. This compares to
sales of $222.4 million in the comparable quarter of the
prior year (rough diamond sales of $89.6 million and luxury brand segment sales of
$132.8 million). See “Segmented Analysis” on page 8 for additional information.
CONSOLIDATED COST OF SALES AND GROSS MARGIN
The Company’s second quarter cost of sales was $104.7 million for a gross margin of
40.8% compared to a cost of sales of $150.2 million and a gross margin of 32.5% for the
comparable quarter of the prior year. The Company’s cost of sales includes costs
associated with mining, rough diamond sorting and luxury brand activities. See “Segmented
Analysis” on page 8 for additional information.
CONSOLIDATED SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The principal components of selling, general and administrative (“SG&A”) expenses
include expenses for salaries and benefits, advertising and marketing, rent and related
costs. The Company incurred SG&A expenses of $55.8 million for the second quarter,
compared to $49.1 million in the comparable quarter of the prior year.
Included in SG&A expenses for the second quarter was $3.0 million for the mining
segment compared to $3.5 million for the comparable quarter of the prior year, $49.5
million for the luxury brand segment compared to $43.3 million for the comparable quarter
of the prior year, and $3.3 million for the corporate segment compared to $2.3 million for
the comparable quarter of the prior year. See “Segmented Analysis” on page 8 for
additional information.
CONSOLIDATED INCOME TAXES
The Company recorded a net income tax expense of $7.3 million during the second
quarter, compared to a net income tax expense of $7.5 million in the comparable quarter of
the prior year. The Company’s combined federal and provincial statutory income tax rate
for the quarter is 26.5%. There are a number of items that can significantly impact the
Company’s effective tax rate, including foreign currency exchange rate fluctuations, the
Northwest Territories mining royalty, earnings subject to tax different than the statutory
rate, and the recognition of previously unrecognized benefits. As a result, the Company’s
recorded tax provision can be significantly different than the expected tax provision
calculated based on the statutory tax rate.
The recorded tax provision is particularly impacted by foreign currency exchange rate
fluctuations. The Company’s functional and reporting currency is US dollars; however, the
calculation of income tax expense is based on income in the currency of the country of
origin. As such, the Company is continually subject to foreign exchange fluctuations,
particularly as the Canadian dollar moves against the US dollar. During the second
quarter, the Canadian dollar weakened against the US dollar. As a result, the Company
recorded an unrealized foreign exchange gain of $3.0 million on the revaluation of the
Company’s Canadian dollar denominated deferred income tax liability. This compares to an
unrealized foreign exchange gain of $1.9 million in the comparable quarter of the prior
year. The unrealized foreign exchange gain is recorded as part of the Company’s deferred
income tax recovery, and is not taxable for Canadian income tax purposes. During the
second quarter, the Company also recognized a deferred income tax expense of $4.0 million
for temporary differences arising from the difference between the historical exchange rate
and the current exchange rate translation of foreign currency non-monetary items. This
compares to a deferred income tax expense of $4.0 million recognized in the comparable
quarter of the prior year. The recorded tax provision in the comparable quarter of the
prior year also included a net income tax recovery of $1.2 million relating to foreign
exchange differences between income in the currency of the country of origin and the US
dollar.
The recorded tax provision of the second quarter included a reversal of $1.0 million
tax benefit that was recognized during the first quarter in relation to deductible
temporary differences previously not recognized as deferred tax assets.
The rate of income tax payable by Harry Winston Inc. varies by jurisdiction. Net
operating losses are available in certain jurisdictions to offset future income taxes
payable in such jurisdictions. The net operating losses are scheduled to expire through
2032.
Due to the number of factors that can potentially impact the effective tax rate and
the sensitivity of the tax provision to these factors, as discussed above, it is expected
that the Company’s effective tax rate will fluctuate in future periods.
CONSOLIDATED FINANCE EXPENSES
Finance expenses of $4.0 million were incurred during the second quarter compared to
$5.2 million during the comparable quarter of the prior year.
CONSOLIDATED EXPLORATION EXPENSE
Exploration expense of $0.6 million was incurred during the second quarter compared to
$0.8 million in the comparable quarter of the prior year.
CONSOLIDATED FINANCE AND OTHER INCOME
Finance and other income of $0.1 million was recorded during the second quarter, which
was consistent with the comparable quarter of the prior year.
CONSOLIDATED FOREIGN EXCHANGE
A net foreign exchange gain of $0.2 million was recognized during the second quarter
compared to a net foreign exchange gain of $0.3 million in the comparable quarter of the
prior year. The
Company does not currently have any significant foreign exchange derivative
instruments outstanding.
Six Months Ended July 31, 2012 Compared
to
Six Months Ended July 31, 2011
CONSOLIDATED NET PROFIT ATTRIBUTABLE TO SHAREHOLDERS
The Company recorded a consolidated net profit attributable to shareholders of $16.4
million or $0.19 per share for the six months ended July 31, 2012, compared to a net
profit attributable to shareholders of $13.6 million or $0.16 per share in the comparable
period of the prior year.
CONSOLIDATED SALES
Sales totalled $369.4 million for the six months ended July 31, 2012, consisting of
rough diamond sales of $150.5 million and luxury brand segment sales of $218.9 million.
This compares to sales of $366.3 million in the comparable period of the prior year (rough
diamond sales of $151.6 million and luxury brand segment sales of $214.7 million). See
“Segmented Analysis” on page 8 for additional information.
CONSOLIDATED COST OF SALES AND GROSS MARGIN
The Company’s cost of sales was $223.8 million for the six months ended July 31, 2012,
for a gross margin of 39.4% compared to a cost of sales of $246.6 million and a gross
margin of 32.7% for the comparable period of the prior year. The Company’s cost of sales
includes costs associated with mining, rough diamond sorting and luxury brand activities.
See “Segmented Analysis” on page 8 for additional information.
CONSOLIDATED SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The principal components of SG&A expenses include expenses for salaries and benefits,
advertising and marketing, rent and related costs. The Company incurred SG&A expenses of
$110.5 million for the six months ended July 31, 2012, compared to $91.9 million in the
comparable period of the prior year.
Included in SG&A expenses for the six months ended July 31, 2012, was $5.5 million for
the mining segment compared to $8.1 million for the comparable period of the prior year,
$96.8 million for the luxury brand segment compared to $78.0 million for the comparable
period of the prior year, and $8.2 million for the corporate segment compared to $5.8
million for the comparable period of the prior year. See
“Segmented Analysis” on page 8 for additional information.
CONSOLIDATED INCOME TAXES
The Company recorded a net income tax expense of $9.9 million during the six months
ended July 31, 2012, compared to a net income tax expense of $4.5 million in the
comparable period of the prior year. The Company’s combined federal and provincial
statutory income tax rate for the six months ended July 31, 2012 is 26.5%. There are a
number of items that can significantly impact the Company’s effective tax rate, including
foreign currency exchange rate fluctuations, the Northwest Territories mining royalty,
earnings subject to tax different than the statutory rate, and the recognition of
previously unrecognized benefits. As a result, the Company’s recorded tax provision can be
significantly different than the expected tax provision calculated based on the statutory
tax rate.
The recorded tax provision is particularly impacted by foreign currency exchange rate
fluctuations. The Company’s functional and reporting currency is US dollars; however, the
calculation of income tax expense is based on income in the currency of the country of
origin. As such, the Company is continually subject to foreign exchange fluctuations,
particularly as the Canadian dollar moves against the US dollar. During the six months
ended July 31, 2012, the Canadian dollar did not move against the US dollar. As a result,
the Company did not record any unrealized foreign exchange gain or loss on the revaluation
of the Company’s Canadian dollar denominated deferred income tax liability. This compares
to an unrealized foreign exchange loss of $9.8 million in the comparable period of the
prior year. During the six months ended July 31, 2012, the Company recognized a deferred
income tax expense of $2.5 million for temporary differences arising from the difference
between the historical exchange rate and the current exchange rate translation of foreign
currency non-monetary items. This compares to a deferred income tax recovery of $8.6
million recognized in the comparable period of the prior year. The recorded tax provision
during the six months ended July 31, 2012 also included a net income tax recovery of $2.0
million relating to foreign exchange differences between income in the currency of the
country of origin and the US dollar. This compares to a net income tax recovery of $3.2
million recognized in the comparable period of the prior year.
The rate of income tax payable by Harry Winston Inc. varies by jurisdiction. Net
operating losses are available in certain jurisdictions to offset future income taxes
payable in such jurisdictions. The net operating losses are scheduled to expire through
2032.
Due to the number of factors that can potentially impact the effective tax rate and
the sensitivity of the tax provision to these factors, as discussed above, it is expected
that the Company’s effective tax rate will fluctuate in future periods.
CONSOLIDATED FINANCE EXPENSES
Finance expenses of $7.9 million were incurred during the six months ended July 31,
2012, compared to $9.2 million during the comparable period of the prior year.
CONSOLIDATED EXPLORATION EXPENSE
Exploration expense of $0.8 million was incurred during the six months ended July 31,
2012, compared to $1.0 million in the comparable period of the prior year.
CONSOLIDATED FINANCE AND OTHER INCOME
Finance and other income of $0.2 million was recorded during the six months ended July
31, 2012, compared to $0.3 million in the comparable period of the prior year.
CONSOLIDATED FOREIGN EXCHANGE
A net foreign exchange loss of $0.2 million was recognized during the six months ended
July 31, 2012, compared to a net foreign exchange gain of $0.1 million in the comparable
period of the prior year. The
Company does not currently have any significant foreign exchange derivative
instruments outstanding.
Segmented Analysis
The operating segments of the Company include mining, luxury brand and corporate
segments. The corporate segment captures costs not specifically related to operations of
the mining or luxury brand segments.
Mining
The mining segment includes the production, sorting and sale of rough diamonds.
(expressed in thousands of United States dollars)
(quarterly results are unaudited)
2013 2013 2012 2012 2012
Q2 Q1 Q4 Q3 Q2
Sales
America $ 2,269 $ 7,432 $ 2,727 $ 8,835 $ 447
Europe 50,514 54,370 78,846 21,993 80,131
Asia 8,690 27,207 20,659 5,411 9,030
Total sales 61,473 89,009 102,232 36,239 89,608
Cost of sales 46,784 70,099 72,783 34,112 67,613
Gross margin 14,689 18,910 29,449 2,127 21,995
Gross margin (%) 23.9% 21.2% 28.8% 5.9% 24.5%
Selling, general and
administrative expenses 2,966 2,525 2,061 3,274 3,489
Operating profit (loss) $ 11,723 $ 16,385 $ 27,388 $ (1,147) $ 18,506
Depreciation and
amortization(i) 13,160 22,172 24,284 19,932 17,461
EBITDA(ii) $ 24,883 $ 38,557 $ 51,672 $ 18,785 $ 35,967
TABLE CONT’D
Six Six
months months
ended ended
2012 2011 2011 July 31, July 31,
Q1 Q4 Q3 2012 2011
Sales
America $ 3,009 $ 2,689 $ 2,560 $ 9,701 $ 3,456
Europe 50,752 75,715 50,353 104,884 130,883
Asia 8,274 4,293 7,795 35,897 17,304
Total sales 62,035 82,697 60,708 150,482 151,643
Cost of sales 53,443 61,822 45,039 116,883 121,056
Gross margin 8,592 20,875 15,669 33,599 30,587
Gross margin (%) 13.9% 25.2% 25.8% 22.3% 20.2%
Selling, general and
administrative expenses 4,630 3,017 3,031 5,491 8,119
Operating profit (loss) $ 3,962 $ 17,858 $ 12,638 $ 28,108 $ 22,468
Depreciation and
amortization (i) 17,083 20,669 15,428 35,332 34,544
EBITDA (ii) $ 21,045 $ 38,527 $ 28,066 $ 63,440 $ 57,012
(i) Depreciation and amortization included in cost of sales and selling,
general and administrative expenses.
(ii) Earnings before interest, taxes, depreciation and amortization
("EBITDA"). See "Non-IFRS Measure" on page 17.
Three Months Ended July 31, 2012 Compared to Three Months Ended July 31, 2011
MINING SALES
During the second quarter the Company sold approximately 0.43 million carats for a
total of $61.5 million for an average price per carat of $142 compared to approximately
0.57 million carats for a total of $89.6 million for an average price per carat of $157 in
the comparable quarter of the prior year. The 24% decrease in the quantity of carats sold
was primarily the result of the Company’s decision to hold some inventory until stability
returns to the rough diamond market. The 10% decrease in the Company’s achieved average
rough diamond prices in the second quarter resulted from a decrease in the market price
for rough diamonds from the peak achieved in July 2011, partially offset by the sale of
the higher priced goods held back by the Company in the first quarter of fiscal 2013 due
to an observed imbalance in the rough and polished diamond prices for these goods during
that period.
Had the Company sold only the last production shipped in the second quarter, the
estimated achieved price would have been approximately $104 per carat based on the prices
achieved in the March/April 2012 sale adjusted down by 14% to reflect current market
conditions.
The Company expects that results for its mining segment will continue to fluctuate
depending on the seasonality of production at the Diavik Diamond Mine, the number of sales
events conducted during the quarter, rough diamond prices and the volume, size and quality
distribution of rough diamonds delivered from the Diavik Diamond Mine and sold by the
Company in each quarter.
MINING COST OF SALES AND GROSS MARGIN
The Company’s second quarter cost of sales was $46.8 million resulting in a gross
margin of 23.9% compared to a cost of sales of $67.6 million and a gross margin of 24.5%
in the comparable quarter of the prior year. Cost of sales for the second quarter included
$12.5 million of depreciation and amortization compared to $16.8 million in the comparable
quarter of the prior year. The mining gross margin is anticipated to fluctuate between
quarters, resulting from variations in the specific mix of product sold during each
quarter and rough diamond prices.
A substantial portion of cost of sales is mining operating costs, which are incurred
at the Diavik Diamond Mine. During the second quarter, the Diavik cash cost of production
was $40.6 million compared to $40.5 million in the comparable quarter of the prior year.
Cost of sales also includes sorting costs, which consists of the Company’s cost of
handling and sorting product in preparation for sales to third parties, and depreciation
and amortization, the majority of which is recorded using the unit-of-production method
over estimated proven and probable reserves.
The Company’s MD&A refers to cash cost of production, a non-IFRS performance measure,
in order to provide investors with information about the measure used by management to
monitor performance. This information is used to assess how well the Diavik Diamond Mine
is performing compared to the mine plan and prior periods. Cash cost of production
includes mine site operating costs such as mining, processing and administration, but is
exclusive of amortization, capital, and exploration and development costs. Cash cost of
production does not have any standardized meaning prescribed by IFRS and differs from
measures determined in accordance with IFRS. This performance measure is intended to
provide additional information and should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with IFRS. This measure is
not necessarily indicative of net profit or cash flow from operations as determined under
IFRS. The following table provides a reconciliation of cash cost of production to the
mining segment cost of sales disclosed in the interim condensed consolidated financial
statements for the three months ended July 31, 2012 and 2011.
(expressed in thousands Three months ended Three months ended
of United States dollars) July 31, 2012 July 31, 2011
Diavik cash cost of production $ 40,594 $ 40,542
Private royalty 1,089 1,718
Other cash costs 602 940
Total cash cost of production 42,285 43,200
Depreciation and amortization 16,015 17,963
Total cost of production 58,300 61,163
Adjusted for stock movements (11,516) 6,450
Total cost of sales $ 46,784 $ 67,613
MINING SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses for the mining segment decreased by $0.5 million from the comparable
quarter of the prior year.
Six Months Ended July 31, 2012 Compared to Six Months Ended July 31, 2011
MINING SALES
During the six months ended July 31, 2012, the Company sold approximately 1.45 million
carats for a total of $150.5 million for an average price per carat of $104 compared to
approximately 1.04 million carats for a total of $151.6 million for an average price per
carat of $146 in the comparable period of the prior year. The 39% increase in the quantity
of carats sold was primarily the result of the sale of almost all of the remaining lower
priced goods originally held back in inventory by the Company at October 31, 2011 due to
an oversupply in the market at that time, along with higher production in the six-month
period compared to the same period of the prior year. The 29% decrease in the Company’s
achieved average rough diamond prices in the six-month period resulted from a combination
of two factors: first, the sale of the lower priced goods originally held back in
inventory by the Company at October 31, 2011; and second, a decrease in the market price
for rough diamonds from the peak achieved in the comparable period of the prior year.
MINING COST OF SALES AND GROSS MARGIN
The Company’s cost of sales was $116.9 million during the six months ended July 31,
2012, resulting in a gross margin of 22.3% compared to a cost of sales of $121.1 million
and a gross margin of 20.2% in the comparable period of the prior year. Cost of sales for
the six months ended July 31, 2012, included $34.0 million of depreciation and
amortization compared to $33.2 million for the comparable period of the prior year. The
mining gross margin is anticipated to fluctuate between quarters, resulting from
variations in the specific mix of product sold during each quarter and rough diamond
prices.
A substantial portion of cost of sales is mining operating costs, which are incurred
at the Diavik Diamond Mine. During the six months ended July 31, 2012, the Diavik cash
cost of production was $84.6 million compared to $85.1 million in the comparable period of
the prior year. Cost of sales also includes sorting costs, which consists of the Company’s
cost of handling and sorting product in preparation for sales to third parties, and
depreciation and amortization, the majority of which is recorded using the
unit-of-production method over estimated proven and probable reserves.
The following table provides a reconciliation of cash cost of production to the mining
segment cost of sales disclosed in the interim condensed consolidated financial statements
for the six months ended July 31, 2012 and 2011.
(expressed in thousands Six months ended Six months ended
of United States dollars) July 31, 2012 July 31, 2011
Diavik cash cost of production $ 84,630 $ 85,132
Private royalty 3,727 3,296
Other cash costs 2,031 1,946
Total cash cost of production 90,388 90,374
Depreciation and amortization 29,786 33,686
Total cost of production 120,174 124,060
Adjusted for stock movements (3,291) (3,004)
Total cost of sales $ 116,883 $ 121,056
MINING SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses for the mining segment decreased by $2.6 million from the comparable
period of the prior year primarily due to executive severance incurred in the first
quarter of the prior year.
MINING SEGMENT OPERATIONAL UPDATE
Ore production for the second calendar quarter consisted of 1.5 million carats
produced from 0.44 million tonnes of ore from the A-418 kimberlite pipe, 0.2 million
carats produced from 0.07 million tonnes of ore from the A-154 North kimberlite pipe, and
0.1 million carats produced from 0.03 million tonnes of ore from the A-154 South
kimberlite pipe. During the second calendar quarter, there was no production from
reprocessed plant rejects (“RPR”). RPR are not included in the Company’s reserves and
resource statement and are therefore incremental to production. Rough diamond production
was consistent with the comparable calendar quarter of the prior year.
HARRY WINSTON DIAMOND LIMITED PARTNERSHIP’S 40% SHARE OF DIAVIK DIAMOND MINE
PRODUCTION
(reported on a one-month lag)
Three months Three months Six months Six months
ended ended ended ended
June 30, June 30, June 30, June 30,
2012 2011 2012 2011
Diamonds recovered
(000s carats) 716 716 1,359 1,256
Grade (carats/tonne) 3.34 3.29 3.19 3.06
During the second quarter, the Company expanded its Mumbai, India, office to the
Bharat Diamond Bourse in Bandra, India. The new office will continue to support the
Company’s polished buying and rough sorting and sales expansion in India.
Mining Segment Outlook
PRODUCTION
The plan for calendar 2012 foresees Diavik Diamond Mine production remaining at
approximately 8 million carats from the mining of 2.0 million tonnes of ore and processing
of 2.2 million tonnes of ore. Open pit mining of approximately 1.0 million tonnes is
expected to be exclusively from A-418. Underground mining of approximately 1.0 million
tonnes is expected to be sourced principally from the A-154 South and A-154 North
kimberlite pipes with some production from A-418 in the latter half of the year. Included
in the estimated production for calendar 2012 is approximately 1.0 million carats from RPR
and 0.1 million carats from the implementation of an improved recovery process for small
diamonds. These RPR and small diamond recoveries are not included in the Company’s
reserves and resource statement and are therefore incremental to production.
The Company issued an updated life-of-mine plan in August for the Diavik Diamond Mine
with a $2.6 billion net asset value on a 100% basis based on reserves and resources
including A-21.
Looking beyond calendar 2012, the objective is to fully utilize processing capacity
with a combination of production from the underground portions of A-154 South, A-154 North
and A-418 supplemented by the A-21 open pit. The A-21 pre-feasibility study currently
being undertaken assumes that the A-21 pipe will be mined with the open pit methods used
for the other pipes. A dike would be constructed similar to the two other pits but smaller
in size. Detailed plans are still being refined and optimized although no underground
mining is being planned. The capital expenditures are estimated to be in the region of
$500 million (100% basis) at an assumed average Canadian/US dollar exchange rate of $1.00.
PRICING
Rough diamond prices have softened during the first six months of fiscal 2013. Based
on prices from the Company’s last complete rough diamond sale in March/April 2012 and the
current diamond recovery profile of the Diavik processing plant, the Company has modeled
the approximate average rough diamond price per carat as of March/April 2012 for each of
the Diavik ore types in the table that follows. The Company estimates that with the
softening rough diamond market, the current market prices have declined by approximately
14% from March/April 2012.
March/April 2012
average price per
carat
Ore type (in US dollars)
A-154 South $ 160
A-154 North 205
A-418 A Type Ore 145
A-418 B Type Ore 100
RPR 55
COST OF SALES AND CASH COST OF PRODUCTION
The Company expects cost of sales in fiscal 2013 to be approximately $330 million.
Included in this amount is depreciation and amortization of approximately $110 million at
an assumed average Canadian/US dollar exchange rate of $1.00. If the current softening of
the rough diamond market continues, the Company may elect to hold more rough diamond
inventory than normal at January 31, 2013. Depending on the amount of rough diamond
inventory carried over into fiscal 2014, a portion of the $330 million cost of sales
forecasted for fiscal 2013 would be recognized in fiscal 2014. At July 31, 2012, the
Company had approximately 0.7 million carats of rough diamond inventory with an estimated
current market value of approximately $90 million, of which approximately $65 million
represents inventory available for sale.
The Company’s share of the cash cost of production at the Diavik Diamond Mine for
calendar 2012 is expected to be approximately $173 million at an assumed average
Canadian/US dollar exchange rate of $1.00.
CAPITAL EXPENDITURES
During fiscal 2013, HWDLP’s 40% share of the planned capital expenditures at the
Diavik Diamond Mine is expected to be approximately $78 million at an assumed average
Canadian/US dollar exchange rate of $1.00. HWDLP’s share of capital expenditures was $14.8
million for the three months ended July 31, 2012, and $30.4 million for the six months
ended July 31, 2012.
Luxury Brand
The luxury brand segment includes sales from 21 Harry Winston salons, which are
located in prime markets around the world, including eight salons in the United States:
New York, Beverly Hills, Bal Harbour, Honolulu, Las Vegas, Dallas, Chicago and Costa Mesa;
five salons in Japan: Ginza, Roppongi Hills, Osaka, Omotesando and Nagoya; two salons in
Europe: Paris and
London; and six salons in Asia outside of Japan: Beijing, two in Shanghai, Taipei,
Hong Kong and Singapore.
(expressed in thousands of United States dollars)
(quarterly results are unaudited)
2013 2013 2012 2012 2012
Q2 Q1 Q4 Q3 Q2
Sales
America $ 35,759 $ 32,286 $ 41,537 $ 28,817 $ 27,183
Europe 15,636 30,054 31,204 19,561 26,098
Asia excluding Japan) 33,956 20,385 17,272 13,133 59,056
Japan 30,073 20,727 23,772 21,966 20,433
Total sales 115,424 103,452 113,785 83,477 132,770
Cost of sales 57,910 49,035 57,024 41,378 82,513
Gross margin 57,514 54,417 56,761 42,099 50,257
Gross margin (%) 49.8% 52.6% 49.9% 50.4% 37.9%
Selling, general and
administrative expenses 49,495 47,311 49,929 40,635 43,331
Operating profit $ 8,019 $ 7,106 $ 6,832 $ 1,464 $ 6,926
Depreciation and
amortization [(i)] 3,681 3,235 3,089 3,048 3,115
EBITDA [(ii)] $ 11,700 $ 10,341 $ 9,921 $ 4,512 $ 10,041
TABLE CONT’D
Six Six
months months
ended ended
2012 2011 2011 July 31, July 31,
Q1 Q4 Q3 2012 2011
Sales
America $ 35,487 $ 46,489 $ 20,977 $ 68,045 $ 62,670
Europe 17,446 15,701 27,155 45,690 43,544
Asia excluding Japan) 14,354 50,817 16,671 54,341 73,410
Japan 14,610 19,654 15,366 50,800 35,043
Total sales 81,897 132,661 80,169 218,876 214,667
Cost of sales 42,958 79,518 39,675 106,945 125,472
Gross margin 38,939 53,143 40,494 111,931 89,195
Gross margin (%) 47.5% 40.1% 50.5% 51.1% 41.6%
Selling, general and
administrative expenses 34,716 47,866 34,942 96,806 78,046
Operating profit $ 4,223 $ 5,277 $ 5,552 $ 15,125 $ 11,149
Depreciation and
amortization (i) 3,069 3,688 2,882 6,916 6,184
EBITDA (ii) $ 7,292 $ 8,965 $ 8,434 $ 22,041 $ 17,333
(i) Depreciation and amortization included in cost of sales and selling,
general and administrative expenses.
(ii) Earnings before interest, taxes, depreciation and amortization
("EBITDA"). See "Non-IFRS Measure" on page 17.
Three Months Ended July 31, 2012 Compared to Three Months Ended July 31, 2011
LUXURY BRAND SALES
Sales for the second quarter were $115.4 million compared to $132.8 million
for the comparable quarter of the prior year, a decrease of 13% (a decrease of 11% at
constant exchange rates). Sales in America increased 32% to $35.8 million, European sales
decreased 40% to $15.6 million, sales in Asia (excluding Japan) decreased 43% to $34.0
million and sales in Japan increased 47% to $30.1 million, each as compared to the
comparable quarter of the prior year. The second quarter of the prior year included a
high-value transaction in Asia (excluding Japan) that was not repeated in the current
quarter. The Japanese market continued to rebound strongly from the impact of the
earthquake and tsunami that occurred in early 2011. During the second quarter, there were
$19.1 million of high-value transactions, which generally carry lower-than-average gross
margins, compared with $55.6 million in the comparable quarter of the prior year. The
total number of units sold increase by 40% over the comparable quarter of the prior year.
LUXURY BRAND COST OF SALES AND GROSS MARGIN
Cost of sales for the luxury brand segment for the second quarter was $57.9 million
compared to $82.5 million for the comparable quarter of the prior year. Gross margin for
the quarter was $57.5 million or 49.8% compared to $50.3 million or 37.9% for the second
quarter of the prior year. The improvement in gross margin was primarily due to product
mix and a greater portion of high-value transactions in the comparable quarter of the
prior year that generated lower-than-average gross margins.
LUXURY BRAND SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses increased by 14% to $49.5 million from $43.3 million in the comparable
quarter of the prior year. The increase was due primarily to higher advertising, marketing
and selling expenses. Fixed costs accounted for $4.3 million of the increase, while
variable expenses linked to volume of sales accounted for $1.9 million of the increase.
Fixed costs include salaries and benefits, advertising and marketing, rent and related
costs and depreciation and amortization. SG&A expenses included depreciation and
amortization expense of $3.4 million compared to $3.0 million in the comparable quarter of
the prior year.
Six Months Ended July 31, 2012 Compared to Six Months Ended July 31, 2011
LUXURY BRAND SALES
Sales for the six months ended July 31, 2012, were $218.9 million compared to $214.7
million for the comparable period of the prior year, an increase of 2% (4% at constant
exchange rates). Sales in America increased 9% to $68.0 million, European sales increased
5% to $45.7 million, sales in Asia (excluding Japan) decreased 26% to $54.3 million and
sales in Japan increased 45% to $50.8 million, each as compared to the comparable period
of the prior year. The comparable period of the prior year included high-value
transactions in Asia (excluding Japan) that were not repeated in the current period. The
Japanese market continued to rebound strongly from the impact of the earthquake and
tsunami that occurred in early 2011. During the six months ended July 31, 2012, there were
$19.1 million of high-value transactions, which generally carry lower-than-average gross
margins, compared with $60.8 million in the comparable period of the prior year. The total
number of units sold increase by 43% over the comparable period of the prior year.
LUXURY BRAND COST OF SALES AND GROSS MARGIN
Cost of sales for the luxury brand segment for the six months ended July 31, 2012, was
$106.9 million compared to $125.5 million for the comparable period of the prior year.
Gross margin for the six months ended July 31, 2012, was $111.9 million or 51.1% compared
to $89.2 million or 41.6% for the comparable period of the prior year. The improvement in
gross margin was primarily due to product mix and a greater portion of high-value
transactions in the comparable period of the prior year that generated lower-than-average
gross margins.
LUXURY BRAND SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses increased by 24% to $96.8 million from $78.0 million in the comparable
period of the prior year. The increase was due primarily to higher advertising, marketing
and selling expenses. Fixed costs accounted for $14.9 million of the increase, while
variable expenses linked to volume of sales accounted for $3.9 million of the increase.
Fixed costs include salaries and benefits, advertising and marketing, rent and related
costs and depreciation and amortization. SG&A expenses included depreciation and
amortization expense of $6.3 million compared to $6.0 million in the comparable quarter of
the prior year.
LUXURY BRAND SEGMENT OPERATIONAL UPDATE
The luxury brand segment opened a new directly operated salon in the Harrods
department store in London, England, in August. A new licensed salon was opened in May in
Moscow, Russia. In addition, the Company has entered into a lease to open a new directly
operated salon on Rue du Rhone in Geneva, Switzerland. This salon is expected to open in
early calendar 2013. At July 31, 2012, the luxury brand segment’s distribution network
consisted of 21 directly operated salons, five licensed salons (in Manila, Philippines;
Kiev, Ukraine; Moscow, Russia; and two in Dubai, United Arab Emirates) and 196 wholesale
watch doors around the world.
On August 30, 2012, the Company’s luxury brand subsidiary, Harry Winston Inc.,
refinanced its senior secured revolving credit facility by entering into a new secured
five-year credit agreement with a consortium of banks led by Standard Chartered Bank
establishing a $260 million facility for revolving credit loans. The facility has a
maturity date of August 30, 2017.
Luxury Brand Segment Outlook
The Company expects the trend of wealth creation in emerging markets combined with
increasing tourism to remain key drivers of increasing demand for luxury jewelry and watch
products. Over the long term, consumer brand loyalty for luxury products is expected to
remain strong. In the near term, the sovereign debt crisis in Europe and the resulting
slower growth in the export-driven emerging markets represent challenges that could impact
demand for luxury jewelry and watch products. The Company is well positioned moving into
the second half of the year, supported by a strong advertising campaign and product
assortment, and its global distribution network in prime locations. A new directly
operated salon was opened in the Harrods department store in London, England, in August
2012 and a directly operated salon is expected to be opened early next year in Geneva,
Switzerland. In addition, a new licensed salon is expected to be opened in Kuwait City,
Kuwait in late fiscal 2013.
The Company also plans to expand by 24 wholesale watch doors to 220 doors by the end
of fiscal 2013. The luxury brand segment continues to make strategic investments in the
brand in the areas of new product development, systems, training and infrastructure, new
distribution offices in Hong Kong, Hong Kong, and Miami, US, as well as new salons in
China. SG&A expenses are planned to increase through fiscal year 2014 and then plateau as
the luxury brand segment begins to leverage its fixed costs.
It is expected that through this period of investment, the brand will continue to
grow, however the true benefits of this investment will be achieved beginning in fiscal
2015, when the luxury brand segment begins to leverage its fixed costs.
Corporate
The corporate segment captures costs not specifically related to operations of the
mining or luxury brand segments.
(expressed in thousands of United States dollars)
(quarterly results are unaudited)
2013 2013 2012 2012 2012
Q2 Q1 Q4 Q3 Q2
Sales $ - $ - $ - $ - $ -
Cost of sales - - - 34 51
Gross margin - - - (34) (51)
Gross margin (%) -% -% -% -% -%
Selling, general
and administrative
expenses 3,358 4,833 3,510 2,246 2,281
Operating loss $ (3,358) $ (4,833) $ (3,510) $ (2,280) $ (2,332)
Depreciation and
amortization (i) 139 139 139 141 140
EBITDA (ii) $ (3,219) $ (4,694) $ (3,371) $ (2,139) $ (2,192)
TABLE CONT’D
Six Six
months months
ended ended
2012 2011 2011 July 31, July 31,
Q1 Q4 Q3 2012 2011
Sales $ - $ - $ - $ - $ -
Cost of sales 51 51 51 - 101
Gross margin (51) (51) (51) - (101)
Gross margin (%) -% -% -% -% -%
Selling, general
and administrative
expenses 3,449 1,839 3,309 8,191 5,731
Operating loss $ (3,500) $ (1,890) $ (3,360) $ (8,191) $ (5,832)
Depreciation and
amortization (i) 139 278 347 279 279
EBITDA (ii) $ (3,361) $ (1,612) $ (3,013) $ (7,912) $ (5,553)
(i) Depreciation and amortization included in cost of sales and selling,
general and administrative expenses.
(ii) Earnings before interest, taxes, depreciation and amortization
("EBITDA"). See "Non-IFRS Measure" on page 17.
Three Months Ended July 31, 2012 Compared to Three Months Ended July 31, 2011
CORPORATE SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses for the corporate segment increased by $1.1 million from the comparable
quarter of the prior year due to travel expenses and salaries and benefits related to
additional corporate employees.
Six Months Ended July 31, 2012 Compared to Six Months Ended July 31, 2011
CORPORATE SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
SG&A expenses for the corporate segment increased by $2.5 million from the comparable
period of the prior year due to severance costs and to travel expenses and salaries and
benefits related to additional corporate employees.
Liquidity and Capital Resources
Working Capital
As at July 31, 2012, the Company had unrestricted cash and cash equivalents of $74.6
million compared to $78.1 million at January 31, 2012. The Company had cash on hand and
balances with banks of $69.3 million and short-term investments of $5.3 million at July
31, 2012.
During the quarter ended July 31, 2012, the Company reported cash from operations of
$8.6 million compared to $36.4 million in the comparable quarter of the prior year. The
decrease resulted primarily from the Company’s decision to hold rough diamond inventory
due to market conditions. At July 31, 2012, the Company had 0.7 million carats of rough
diamond inventory with an estimated current market value of approximately $90 million, of
which approximately $65 million represents inventory available for sale.
Working capital decreased to $241.9 million at July 31, 2012 from $439.0 million at
January 31, 2012. As at July 31, 2012, current liabilities include $204.0 million relating
to the luxury brand segment’s five-year revolving credit facility (January 31, 2012 -
$nil), which was originally to mature on March 31, 2013, but which was refinanced on
August 30, 2012. During the quarter, the Company increased accounts receivable by $3.0
million, decreased other current assets by $6.3 million, decreased inventory and supplies
by $4.4 million, decreased trade and other payables by $17.1 million and decreased
employee benefit plans by $1.0 million.
The Company’s liquidity requirements fluctuate from quarter to quarter depending on,
among other factors, the seasonality of production at the Diavik Diamond Mine, seasonality
of mine operating expenses, capital expenditure programs, the number of rough diamond
sales events conducted during the quarter and the volume, size and quality distribution of
rough diamonds delivered from the Diavik Diamond Mine and sold by the Company in each
quarter, along with the seasonality of sales and salon expansion in the luxury brand
segment. The Company’s principal working capital needs include investments in inventory,
other current assets, and trade and other payables and income taxes payable.
The Company assesses liquidity and capital resources on a consolidated basis. The
Company’s requirements are for cash operating expenses, working capital, contractual debt
requirements and capital expenditures. The Company believes that it will generate
sufficient liquidity to meet its anticipated requirements for the next twelve months.
Financing Activities
The mining segment maintains a senior secured revolving credit facility with Standard
Chartered Bank. At July 31, 2012, $50.0 million was outstanding.
As at July 31, 2012, $6.6 million and $nil was outstanding under the Company’s
revolving financing facility relating to its Belgian subsidiary, Harry Winston Diamond
International N.V., and its Indian subsidiary, Harry
Winston Diamond (India) Private Limited, respectively, compared to $nil and $4.3
million at January 31, 2012.
During the quarter, the Company’s luxury brand subsidiary, Harry Winston Inc.,
increased the amount outstanding on its secured five-year revolving credit facility to
$204.0 million from $200.5 million at January 31, 2012. On August 30, 2012, Harry Winston
Inc. refinanced its senior secured revolving credit facility by entering into a new
secured five-year credit agreement with a consortium of banks led by Standard Chartered
Bank establishing a $260 million facility for revolving credit loans. The facility has a
maturity date of August 30, 2017.
Investing Activities
During the quarter, the Company purchased property, plant and equipment of $17.8
million, of which $15.8 million was purchased for the mining segment and $2.0 million for
the luxury brand segment.
Contractual Obligations
The Company has contractual payment obligations with respect to interest-bearing loans
and borrowings and, through its participation in the Joint
Venture, future site restoration costs at the Diavik Diamond Mine level. Additionally,
at the Joint Venture level, contractual obligations exist with respect to operating
purchase obligations, as administered by DDMI, the operator of the mine. In order to
maintain its 40% ownership interest in the Diavik Diamond Mine, HWDLP is obligated to fund
40% of the Joint Venture’s total expenditures on a monthly basis. Not reflected in the
table below are capital expenditures for the calendar years 2012 to 2016 of approximately
$140 million assuming a Canadian/US average exchange rate of $1.00 for each of the five
years relating to HWDLP’s current projected share of the planned capital expenditures
excluding the A-21 pipe at the Diavik Diamond Mine. The most significant contractual
obligations for the ensuing five-year period can be summarized as follows:
Contractual Obligations
(expressed in thousands Less than Year Year After
of United States dollars) Total 1 year 2-3 4-5 5 years
Interest-bearing loans
and borrowings (a)(b) $ 355,069 $ 42,404 $ 70,442 $ 223,955 $ 18,268
Environmental and participation
agreements incremental
commitments (c) 93,322 82,668 4,844 - 5,810
Operating lease
obligations (d) 261,447 26,581 54,140 47,952 132,774
Total contractual obligations $ 709,838 $ 151,653 $ 129,426 $ 271,907 $ 156,852
(a) Interest-bearing loans and borrowings presented in the foregoing table include
current and long-term portions. The mining segment maintains a senior secured revolving
credit facility with Standard Chartered Bank for $125.0 million. The facility has an
initial maturity date of June 24, 2013 with two one-year extensions at the Company’s
option. There are no scheduled repayments required before maturity. At July 31, 2012,
$50.0 million was outstanding.
The Company has available a $45.0 million revolving financing facility (utilization in
either US dollars or Euros) with Antwerp Diamond Bank for inventory and receivables
funding in connection with marketing activities through its Belgian subsidiary, Harry
Winston Diamond International N.V., and its Indian subsidiary, Harry Winston Diamond
(India) Private Limited. Borrowings under the Belgian facility bear interest at the bank’s
base rate plus 1.5%. Borrowings under the Indian facility bear an interest rate of 12.50%.
At July 31, 2012, $6.6 million and $nil were outstanding under this facility relating to
its Belgian subsidiary, Harry Winston Diamond International N.V., and its Indian
subsidiary, Harry Winston Diamond (India) Private Limited, respectively. The facility is
guaranteed by Harry Winston Diamond Corporation.
Harry Winston Inc. maintains a credit agreement with a syndicate of banks for a $250.0
million five-year revolving credit facility, which expires on March 31, 2013. There are no
scheduled repayments required before maturity. At July 31, 2012, $204.0 million had been
drawn against this secured credit facility.
On August 30, 2012, Harry Winston Inc. refinanced its secured revolving credit
facility by entering into a new secured five-year credit agreement with a consortium of
banks led by Standard Chartered Bank establishing a $260.0 million facility for revolving
credit loans. The new facility expires on August 30, 2017. There are no scheduled
repayments required before maturity. The new credit facility is available to Harry Winston
Inc. for general corporate purposes. As with the previous agreement, the new credit
facility is supported by a $20.0 million limited guarantee provided by Harry Winston
Diamond Corporation. The amount available under this facility is subject to a borrowing
base formula based on certain assets of the luxury brand segment.
The new credit agreement contains affirmative and negative non-financial and financial
covenants, which apply to the luxury brand segment. These provisions include consolidated
minimum tangible net worth, minimum coverage of fixed charges, leverage ratio and
limitations on capital expenditures and certain investments. The new credit agreement also
includes a change of control provision, which would result in the entire unpaid principal
and all accrued interest of the facility becoming due immediately upon change of control,
as defined. Any material adverse change, as defined, in the luxury brand segment’s assets,
liabilities, consolidated financial position or consolidated results of operations
constitutes default under the agreement.
The luxury brand segment has pledged 100% of Harry Winston Inc.’s common stock and 66
2/3% of the common stock of its foreign subsidiaries to the bank to secure the loan.
Inventory and accounts receivable of Harry Winston Inc. are pledged as collateral to
secure the borrowings of Harry Winston Inc. In addition, an assignment of proceeds on
insurance covering security collateral was made.
Loans under the new credit facility can be either fixed rate loans or revolving line
of credit loans. The fixed rate loans will bear interest within a range of 2.50% to 3.25%
above LIBOR based upon a pricing grid determined by the fixed charge coverage ratio.
Interest under this option will be determined for periods of either one, two, three or six
months. The revolving line of credit loans will bear interest within a range of 1.50% to
2.25% above the bank’s prime rate based upon a pricing grid determined by the fixed charge
coverage ratio as well.
Also included in long-term debt of Harry Winston Inc. is a 25-year loan agreement for
CHF 17.5 million ($17.7 million) used to finance the construction of the Company’s watch
factory in Geneva, Switzerland. The loan agreement is comprised of a CHF 3.5 million ($3.5
million) loan and a CHF 14.0 million ($14.2 million) loan. The CHF 3.5 million loan bears
interest at a rate of 3.15% and matures on April 22, 2013. The CHF 14.0 million loan bears
interest at a rate of 3.55% and matures on January 31, 2033. At July 31, 2012, an
aggregate of $15.2 million was outstanding. The bank has a secured interest in the factory
building.
Harry Winston S.A. has a CHF 0.5 million ($0.5 million) finance lease for machinery
located at the watch factory in Geneva, Switzerland. The finance lease has an interest
rate of 1.97% and matures on April 1, 2017. At July 31, 2012, $0.4 million was
outstanding.
Harry Winston Japan, K.K. maintains unsecured credit agreements with three banks,
amounting to Yen1,275 million ($16.3 million). Harry Winston Japan, K.K. also maintains a
secured credit agreement amounting to Yen575 million ($7.4 million). This facility is
secured by inventory owned by Harry Winston Japan, K.K. At July 31, 2012, $23.7 million
was outstanding.
The Company’s first mortgage on real property has scheduled principal payments of
approximately $0.2 million quarterly, may be prepaid at any time, and matures on September
1, 2018. On July 31, 2012, $6.0 million was outstanding on the mortgage payable.
(b) Interest on loans and borrowings is calculated at various fixed and floating
rates. Projected interest payments on the current debt outstanding were based on interest
rates in effect at July 31, 2012, and have been included under interest-bearing loans and
borrowings in the table above. Interest payments for the next twelve months are
approximated to be $10.7 million.
(c) The Joint Venture, under environmental and other agreements, must provide funding
for the Environmental Monitoring Advisory Board. These agreements also state that the
Joint Venture must provide security deposits for the performance by the Joint Venture of
its reclamation and abandonment obligations under all environmental laws and regulations.
The operator of the Joint Venture has fulfilled such obligations for the security deposits
by posting letters of credit of which HWDLP’s share as at July 31, 2012 was $81.1 million
based on its 40% ownership interest in the Diavik Diamond Mine. There can be no assurance
that the operator will continue its practice of posting letters of credit in fulfillment
of this obligation, in which event HWDLP would be required to post its proportionate share
of such security directly, which would result in additional constraints on liquidity. The
requirement to post security for the reclamation and abandonment obligations may be
reduced to the extent of amounts spent by the Joint Venture on those activities. The Joint
Venture has also signed participation agreements with various native groups. These
agreements are expected to contribute to the social, economic and cultural well-being of
area Aboriginal bands. The actual cash outlay for the Joint Venture’s obligations under
these agreements is not anticipated to occur until later in the life of the Diavik Diamond
Mine.
(d) Operating lease obligations represent future minimum annual rentals under
non-cancellable operating leases for Harry Winston Inc. salons and office space.
CONT’D
SOURCE Harry Winston Diamond Corporation
