Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Robert A. Gannicott - Chairman and Chief Executive Officer

Cyrille Baudet - Group Chief Financial Officer

Frederic de Narp - Chief Executive Officer of Harry Winston Inc and President of Harry Winston Inc

Analysts

Irene Nattel - RBC Capital Markets, LLC, Research Division

Oliver Chen - Citigroup Inc, Research Division

Des Kilalea - RBC Capital Markets, LLC, Research Division

Brian MacArthur - UBS Investment Bank, Research Division

John Richmond

Harry Winston Diamond (HWD) Q3 2013 Earnings Call December 7, 2012 8:30 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Harry Winston Diamond Corporation's Fiscal Year 2013 Third Quarter Conference Call. My name is Marie, and I will be your conference coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes.

Now please note that we will be making some forward-looking comments today. Various factors and assumptions were applied in deriving these comments and actual results could differ materially. The principal factors and assumptions that were applied and risks that could cause our results to differ materially from our current expectations are detailed in our filings with Canadian and United States securities regulatory authorities and can be found at www.sedar.com and www.sec.gov.

During today's call, we will also be discussing certain non-IFRS financial measures such as EBITDA. EBITDA does not have a standardized meaning according to IFRS, and Harry Winston defines it as sales minus cost of sales and selling, general and administrative expenses. Please see the press release and MD&A we filed yesterday for further information about this non-IFRS measure. I would now like to turn the presentation over to your host for today's call, your Chairman and CEO, Bob Gannicott. Please proceed, sir.

Robert A. Gannicott

Thanks very much. Good morning, ladies and gentlemen, and welcome to the Third Quarter update call. I am in Yellowknife at the moment while the other 2 participants, Frédéric de Narp, President of the Luxury Brand business; and Cyrille Baudet, Chief Financial Officer are both in New York. This has been a quarter of solid progress for us on many fronts. Our luxury brand jewelry, particularly in the bridal sales category and timepiece business, demonstrated strong growth in the higher margins and broader base sales that this implies. Our timepieces business is undergoing change as we bring wholesale management enhanced rather than through agents, with the new designs of more accessible watches being well received as a broader-based supplement for the high-end design engineering the Harry Winston has become famous for in the world of horology. As well as being very busy on the mining M&A front, we've also seen the Diavik projects switch fully to underground ore production, with the closure in September of the A-418 open pit. Although the underground mine is still tuning its operating procedures, it has already reached and exceeded its plant underground production rate over the last few weeks.

I'm now going to turn the call over to Cyrille, who will take us through the financial results. He will then be followed by Frédéric, who will discuss the Luxury Brand business. Then I'm going to return to discuss the mine, rough diamond business and to the very limited extent that I can, our potential acquisition of the Ekati mine. Over to you, Cyrille.

Cyrille Baudet

Thank you, Bob, and good morning, everyone. Our consolidated sales for the third quarter were $180.4 million with $84.8 million from the Mining segment and $95.6 million from the Luxury Brand segment. Our consolidated gross margin in Q3 was $65.7 million, which in value is 49% ahead of the third quarter of last year, and the Q3 consolidated gross margin as a percentage of sales was 36%, which is 50 basis points lower than Q3 last year.

In Q3, Mining segment generated sales of $84.8 million, a gross margin of 15.5% compared to sales of $32.6 million and a gross margin of 5.9% in the third quarter of the prior year. Included in the cost of sales for the prior year was a noncash $13 million charge related to the derecognition of the base plant. Excluding the impact of the base plant, gross margin declined versus the prior year, primarily due to the mix of carat sold, which last year being primarily high-value carat versus lower value carat this year.

During Q3, the Mining segment sold 0.88 million carats at an average price per carat of $96 compared to 0.23 million carat at an average price per carat of $156 in the third quarter of the prior year. The 39% decrease in the company's achieved average rough diamond prices during this quarter resulted from the sale of a higher proportion of smaller sized diamond due to an improved market for these goods. Mining segment was at 0.8 million carats of rough diamond inventory, with an estimated current market value of $110 million as of October 31. Out of these $110 million, $60 million represents rough diamond inventory available for sale, while the rest is inventory that is in the process of being graded and sorted.

On the Luxury Brand side, gross margin percentage for this quarter increased by 460 basis points compared to last quarter, and by 25% in value. The improved results were driven by a number of factors. This include planned action as part of our long-term strategy like reduced sales discounts, improved product mix with higher sales of bridal jewelry, timepieces and access jewelry, improved wholesale timepieces margin as result of new product launches and higher production volume that creates operating leverage.

Consolidated SG&A expense increased 20% to $55.4 million in the third quarter versus $46.2 million in Q3 of the prior year. SG&A for our Mining segment increased $0.7 million in the third quarter primarily due to cost associated with the Ekati transaction. And on the Luxury Brand segment SG&A increased by $6.6 million in the third quarter of fiscal 2013 or 16% versus the third quarter of last year. The increase was primarily due to higher advertising, selling and rent expenses related to the opening of our new salons.

We are making strategic investment in the brand and we expect SG&A to continue to grow through fiscal '14 and then plateau as we begin to leverage the SG&A spending. So far, we have made strategic investments in new product development, systems training and infrastructure, like new distribution offices in Hong Kong and Miami and new salons in China.

Corporate segment SG&A increased $2 million to $4.3 million for the quarter, primarily due to travel expenses and salaries and benefits related to additional corporate employees. The resulting consolidated and bearing profit for the quarter was $10.3 million versus an operating loss of $2 million in the third quarter of the prior year. Excluding the derecognition of the $13 million base plant, the operating profit would've been $11 million last year. EBITDA increased by 65% in the quarter to $34.8 million versus $21.1 million in the third quarter of the prior year.

Mining segment generating operating profit of $9.2 million and EBITDA of $29.8 million compared to operating loss of $1.1 million and EBITDA of $18.8 million in the comparable quarter of the prior year. Excluding the derecognition of the $13 million base plants, the operating profit for the Mining segment would've been $11.9 million. Mining gross margin was impacted by the sale of a higher proportion of smaller size goods, which carried lower than average gross margin in this current quarter. Larger sized goods, which carry higher than average gross margin remain as part of the inventory, available for sale as of October 31, and closing inventory at October 31 at an estimated value of $110 million, with a cost of $60 million.

Operating profits in the Luxury Brand increased 265% to $5.4 million and EBITDA increased 101% to $9.1 million in the third quarter, compared to operating profit of $1.5 million and EBITDA of $4.5 million last year. Our liquidity is solid with cash on hand of $110.8 million. We have refinanced the Luxury Brand senior operated facility to $300 million for 5 years and we have $75 million available on our Mining segment credit facility. Now, I'd like to hand the call over to Frédéric.

Frederic de Narp

Thank you, Cyrille. Especially as a New York brand, I would like to start out by extending our sympathies to all the families that were impacted by Hurricane Sandy, our team [indiscernible] and our clients suffered the impact of the hurricane and I want to thank our team for both their determination in overcoming the impacts, as well as their generosity in helping others. We'd also like to mention that after a year of restructuring we're thrilled to have on board a new head of our Geneva manufacturer, who will help us reach our timepieces goals of producing 15,000 units in the medium term and also creating our own movements within the next 4 years.

Now to the results. The global luxury market has been quite resilient, generating healthy growth in sales during this past quarter. Luxury retailers are investing significant resources in expanding the distribution network in emerging markets, translating into growing numbers of new luxury consumers. Consumer demand for luxury products was -- from strong western brand continues to expand worldwide with the support of tourism from emerging market. The China market directly, as well as through the benefits of tourism, is still providing the strongest growth in demand for the jewelry products.

Our positive results this quarter and the year-to-date confirm that the strategy that has been in place for nearly 3 years is working. This quarter, we continue to strengthen our product assortment with the introduction of new jewelry, timepiece collections in access and core, and also Ultimate segments. Additionally, we are supporting the expansion of new products and our distribution network with strong innovative advertising campaign, exciting promotional and selling events.

So as a result, sales during the third quarter were up 14% on a current exchange basis to $95.6 million, and up 17% on a constant exchange basis as compared to comparable quarter of the prior year. Most importantly, our gross margin improved to 55% during the quarter from 50.4% in the comparable quarter of the prior year. The increase in margin was achieved as a result of increasing sales of access products.

Our operating profit increased to $5.4 million or 5.6% of sales for the quarter compared to $1.4 million or 1.7% of sales in the comparable quarter of the prior year. We continue to experience strong demand for our new jewelry and timepieces products. Sales of products in the access and core segments continue to increase at double-digit rates in every single continent, translating into an expanding customer base while strengthening our margins.

We generally in a constant exchange rate. Sales for the third quarter in Europe were up 47%; Asia outside of Japan was up 21%; America was up 7%; and Japan was up 1%, each as compared to the comparable quarter of the prior year. Europe experienced strong growth due to the opening of a new salon in the Harrods store in London, in England, as well as several high-profile events. During September, Harry Winston participated in the Biennale des Antiquaires at Grand Palais, Paris, which is the most important fine jewelry exhibition in the world. At the exhibition, the company unveiled its latest high jewelry collection called Water by Harry Winston and the jewelry exhibition provided the company with the opportunity to showcase the talent of its design team and craftsman.

Harry Winston further announced that it is the lead sponsor of the Hollywood costume in major new exhibition that is appearing at the Victoria & Albert Museum in London between October 2012 and January 2013 and the exhibition celebrates costume design in motion pictures and showcases the long relationship between Harry Winston jewels and Hollywood. Harry Winston, as you know, is known for loaning important jewelries to generations of famous actresses, earning the title of Jeweler to the Stars.

The performance in Europe was very good, benefiting from higher sales of access and core products, as well as a now direct to wholesale relationship we have in Switzerland. Partially offsetting these were some expenses related to the planned opening of our [indiscernible] flagship salon, which we will open next year.

In the Americas, sales we're up by 7.1% and performance was solid. We saw increases in sales in our New York city flagship salon, as well as in other North American salon benefiting from tourism, such as Hawaii or Las Vegas. And we continue to invest in our infrastructure, our supply chain improvement and direct to wholesale distribution in Latin and South America.

Driving higher sales in Asia outside of Japan were our new salons in Shanghai, representing significant expansion of our presence in the all-important China market. In Japan, our growth in sales were strong in all salons, driven by core and access bridal and timepieces. However, this growth was offset by the transition in timepiece wholesale distribution to an internal wholesale infrastructure.

Our long-term strategy requires that we balance our risk in growth as appropriate. Markets where we believe we can operate better than a partner, the strategy is to sell directly to watch retailers and gain significantly higher gross margins. In line with this strategy, the company is in the process of taking over its wholesale timepiece distribution in most of Asia from a third party agent. And by the end of the current fiscal year, Harry Winston will have built an internal wholesale infrastructure to distribute its timepieces in Asia, in Europe and in Latin America.

Additionally, in markets where we have strong historical partners, we will continue to support these partners both in wholesale jewelry and timepieces distribution, and expand our network of licensed salons.

Our sales during the 9 months ended October 2012 were up 5% to $314.5 million as compared to the comparable period of the prior year. The company generated high-value transactions in the 9 months ended October '12 amounting to $19.1 million compared with $60.8 million in the prior year. Excluding the higher value transaction from both years, sales during the 9 months period ending October 2012, increased by 24% as compared to the comparable period of the prior year.

Operating profit for the 9 months ended October 2012 was $20.5 million or 6.5% of sales, and sales of $314.5 million compared to operating profit of $12.4 million or 4.2% of sales on sales of $298.1 million in the comparable period of the prior year on the current exchange basis. So these results reinforce the success of our strategy, both on sales and profit. Profits have benefited, not only from improved mix but also other initiatives such as taking back timepiece distribution or controlling the retail discount.

Now onto the outlook. In the short term, we're expecting reasonable growth except in high-value transactions, which are not as predictable. Our new salons in China have significantly improved our global distribution network in the fastest growing luxury market in the world. A new directly operated salon in Geneva, Switzerland is expected to be opened early next year. In addition, a new licensed salon is expected to be opened in Kuwait City, Kuwait, during the first quarter of the next fiscal year. And the company plans to expand by 15 wholesale watch stores to 216 doors by the end of this fiscal year, fiscal year 2013.

So we continue to focus on executing our long-term plan of growing sales and profitability by expanding our distribution networks in prime locations around the world, introducing new jewelry and timepiece collections of the highest quality, supported by a strong advertising program, leveraging the heritage of the Harry Winston brand. We are confident that Harry Winston is well positioned to continue to grow our market share in the luxury jewelry and timepiece sector. We remain true to our heritage by continuing to produce products that use only the highest quality materials and craftsmanship that our brand is known for. We're making every effort to balance our business, both retail and wholesale, access, core, Ultimate product segments and make appropriate geographic expansion. This will help ensure we are not overexposed to any one type of client or geography or product, while growing the value of our brand. I would like to pass the call back to Bob.

Robert A. Gannicott

Thanks, Frédéric. The Diavik mine has made the transition to underground mining more successfully that have been originally anticipated. Expected cut and fill mining has been replaced by a much lower cost combination, sublevel retreat and blast-hole stoping. Production levels have also ramped up faster than initially planned, despite the challenge of mining through the upper level of ground, impacted by the open-pit activity above. In the upper level of the A-418 underground, this involved mining through and processing ore that contained large amounts of steel support material. This is a special challenge for the processing plant that led to mine production exceeding processing capacity for a while. As a result of this, there are now 350,000 tonnes of broken ore, stockpiled on the processing plant feed path and about 1/2 of this will provide incremental feed during calendar 2013.

Processing shortfall this year will mean around 7.1 million carats produced by calendar year end. Looking ahead to next year, the planned production is expected to be 1.6 million tonnes of mined ore processed, with a further 200,000 tonnes processed from the stockpile. This will deliver around 6 million carats during calendar 2013. This plan will receive further definition in January following review by Rio Tinto.

The development of the A-21 pipe, the last of the Diavik kimberlite pipes in the original mine plant, is being deferred due both to the diamond market conditions and decreased urgency following the identification of extensions to the existing pipes. Although these extension areas cannot be categorized as ore at this time due to insignificant definition work, they are expected to extend the life of the existing developed pipes, therefore, differing the need for A-21 as a source to keep the processing platform. Thus, controllers become a central focus of the mine operation instead of 4 wooden turbines as being installed on site. They're producing around 15% of the power demand with an anticipated saving of 4 million to 6 million liters of diesel fuel consumption over the full year.

Operating costs are currently forecast to be around $420 million for calendar 2013. Diamond market has recovered its poise after a relatively prolonged decline from the heights of 2010. It has now given back around 1/2 of the gain that was made since the 2008, 2009 crisis. It is now a healthier market with credit levels and diamond stocks in all levels of the chain under much better control. From our own perspective, we've seen strong sales in Japan and improvement in America, 2 most important diamond markets, while Chinese tourists are having a big impact on sales in other centers. We do not expect rapid near-term rises in rough diamond prices, but we do believe that a corner is being turned in industry where demand is clearly poised to outstrip supply.

We've announced that we've agreed with BHP to purchase their Ekati mine and peripheral property for a total of $500 million. We are now in the middle of a period where the 2 individuals responsible for the discovery of Ekati may seek to exercise certain rights of refusal. Assuming that these rights are not exercised and the other conditions to closing are satisfied, we look forward to them being able to provide more information regarding Ekati and our plans for it in the future.

Finally, I'd like to formally welcome Chuck Strahl to our Board of Directors. Chuck recently retired from almost 18 years of federal politics, having served as both Minister of Transport and Minister of Aboriginal Affairs in Northern Development. His experience and interest in Northern Development is a welcome addition to the board.

Well thanks for listening to us. We are now happy to take your questions. Please keep in mind though that we are not all in the same room, so I am not going to attempt to direct the questions appropriately from my end of the call. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] And now we have our first question and it comes from the line of Irene Nattel from RBC Capital Markets.

Irene Nattel - RBC Capital Markets, LLC, Research Division

Just focusing on the Luxury Brand segment, I was very interested in your comments, Frédéric, about the high-value transaction because I didn't see any reference to any in the third quarter, and I apologize if there was and I just didn't see it. And I would think that at this point, in the fourth quarter, if you were going to have any meaningful transaction, you would know about it given the nature of those. So I was wondering if you could just talk a little bit about what you're seeing in terms of your customer base for those types of transactions at this point in time and their propensity to spend or not at this point.

Frederic de Narp

Yes. Well as we talk, Irene, it's very difficult to talk. It's in the middle of the holiday season and we are in conversations with many important clients. I can tell you many important clients at this very moment in China, in Russia, in the Middle East. So I mean, we have constantly conversations with these clients. The thing I wanted to insist on is that for the first time, you really have what we wanted. In the Q3, you really have all the elements coming together to realize what we're searching. A 55% gross margin is a decent one for the industry and it is initially the objective that I had, and the 5-year vision, to reach in 5 years that we could reach already this quarter after 2.5 years or 3 years executing the strategy. So I wanted to insist on that because I don't want to take you -- tell you sometimes yes, sometimes not, an unpredictable sales. These sales come as cherry in the cake. The large majority of these sales of Harry Winston worldwide is now done of core and access segments which is not the victory but this is the right direction. So I cannot tell you about that. Sometimes you'll have some, sometimes you'll have no. Actually, I have no visibility of transactions like last year over $40 million. I don't have the visibility at this moment, but we surely have transaction spending and conversations going on with clients.

Irene Nattel - RBC Capital Markets, LLC, Research Division

That's very helpful, Frédéric, and I wasn't suggesting for a moment that the progress that you've made is not impressive because certainly it is, which brings me to my next question. I think in your remarks, you were talking about an expansion of the customer base. Clearly, when we're looking at bridal and we're looking at accessible, could you talk a little bit about qualitatively, who these new customers are and regionally where are they coming from.

Frederic de Narp

In Japan, where we are extremely profitable, extremely successful and when we think we're going to double our presence in the next 24 months, in Japan, for example, it's always the same customer base, pretty much 80%, 85% bridal and that does not change. But as we launch new collections like the Belle collection, for example, it was more creative to them, which of course more profitable bridal collections as well, we see the success of the introduction of new collections, which is really exciting. But always with the same kind of clientele base in Japan. For the rest of the world, I'm happy to report that 60% or 70% of all clients buying the new products, jewelry, watches, or the Charms collections, all the Belle Collections are new clients. And that's terrific because this is what we were searching. Especially on 2 collections, I can report the Midnight Collection and the Ocean Collection, are 60% to 70% -- I think it was 70% of purchasers of these watches are new clients to the brand.

Operator

And our next question comes from the line of Oliver Chen from Citigroup.

Oliver Chen - Citigroup Inc, Research Division

Bob, in terms of the opportunity at Ekati, could you speak to your interest in terms of the evolution of the synergies as you see them, between the Luxury division and Mining, as you embark on this potential transaction. And also, Bob, should we expect the trends in terms of selling smaller-sized diamonds to continue in Q4 and how may that impact the average price sold and the gross margin. And I had a few questions for Frédéric as well.

Robert A. Gannicott

Okay. Well I'll deal with the last one first. The stockpile, as Cyrille has pointed out, the stockpile diamond that we've got is actually -- we have actually sold a significant amount of it already this week. This is the week of our last sale of the calendar year, and I'm sure that we've sold a substantial amount of that in the market that is more encouraged by retail offtake on the polished side. So yes, the goods that are there that remain to be sold are higher value and we expect -- we anticipate selling them, basically selling them down completely by the end of our fiscal year, in other words, by the end of January. We've got another sale in the third week of January before the end of fiscal year. There's always a working stock, of course, which is usually on the order of $40 million to $50 million, depending on the volume that comes down from the mine, which is basically with its goods that are in the process of being sorted and being prepared for sale. But we actually turn our goods basically in one cycle, whereas the other bigger producers actually take at least 2 cycles to turn there. Now the relationship of Ekati to the luxury goods division. Well, we own the luxury, we own HWI for a few reasons. But one of the reasons was the information base that it gave us on movements in the diamond market and which has given us the ability to price very nimbly, and also to anticipate movements. In other words, we reasonably hold diamond stocks through the cycle, particularly in times like this where the market has been particularly difficult. Because we can -- we have the confidence given by seeing that the polished article of a particular type may be actually in demand in the market, even though the market is very sloppy in general. There are always items that have been underproduced and are therefore in demand. So we can kind of translate that into -- well if we hold onto the rough diamond equivalent of that, we can anticipate a better price for that rough diamond in the near term. I mean, we're not trying to be kind of what De Beers used to be, which is planning a box on the diamond market, I mean, we're not try to do that. We're just simply trying to be nimble about holding onto articles for a couple of months if we think the price is rising and selling them once we think the market might be getting softer, and therefore, the price, anticipating a lower price following that. So that's one meaning that it's had. We do not take many stones from the diamond production over to the retail side. Although we do -- we're doing it more often now because Diavik has produced from the A-154 north pipe, it's producing large high-quality stones, which it didn't do before when we were only producing from [indiscernible] A-418. So there are large gems coming through and we have elected to buy those rough diamonds from the joint venture, have them polished and sell them in the retail network. Of course, Ekati does have more of those and because there isn't a joint venture partner on the diamond sales side, it's actually easier to contemplate taking some of those through. In particular, Ekati and the pipe that is now back to be mined in the second period of its life, which is the Misery pipe, so-called by the way because it's extra peninsula platform is there. It's not because of the quality of the diamond production from it. The Misery pipe contains some very intense-colored yellow diamonds of particularly good quality of yellow diamond. And so there again, there's going to be a small-ish family of stones that are appropriate to the luxury retail business. We've also more recently got into the business of polishing small stones, particularly for the watch -- for our watch business. I mean, these diamonds that are used in watches are like engineering components. The hole that they fit in is an engineered hole and they have to be exactly the same diameter, not only the same quality, the same color, the same clarity and so on, but they have to be exactly the same diameter, have exactly the same depth of pavilion and height of table and so on. So they're like an engineered component. And there's a serious premium made for obtaining parcels like that. So we have elected to do, polish some of those. The stones have come from our own production that are appropriate to that. We've elected to do those ourselves. The Ekati production actually has a particularly good family of those sort of stones. Without getting into details, they do produce a much bigger population of these smaller piece of quality stones that could be used for that. So that's the impacts there.

Oliver Chen - Citigroup Inc, Research Division

From a bigger picture perspective, how should investors be thinking about what they're investing in? As you think about incremental M&A on the Mining side, what's the relationship between this and your organic development of the diamond retail luxury, which has been going extremely well?

Robert A. Gannicott

We don't have any great pressure to dispose of diamond luxury retail business. I don't think -- it's not a particularly good time to contemplate doing that anyway. But we have, in order to purchase Ekati, we have taken on a debt facility that covers all of that, including the reclamation, environmental reclamation and so on. So we don't see any -- there's no business reason really to separate these 2 businesses. Well I'd always thought that as the evolution of time, with the HWI business getting to a point where it can stand on its own feet, it could be separated as a separate public company. Clearly, that time is not now. It still requires further investment and it still needs to get through at least another year. We still got basically the growth of SG&A still taking most of the profit away as we grow the business, and that's an intentional decision. We don't want to be sort of left behind doing a small business. I guess, that's not appropriate for a public company either. So I mean, in the fullness of time, it will certainly either become separated or else be sold to someone who can do better with it than we would be able to.

Oliver Chen - Citigroup Inc, Research Division

As a final question, there has been great, impressive success on the Luxury side, congratulations. And the growth drivers in terms of how you become more direct-to-consumer and the opportunity to rationalize agents, how should we think about the revenue and gross margin upside from that strategic and financial decision. And then secondly, it sounded like SG&A spending, it is the right ROI at this point in time. Does that imply, with respect to your comments that SG&A will grow faster than sales in the near term, I think that is what I'm hearing.

Robert A. Gannicott

Over to you, Cyrille.

Cyrille Baudet

Yes. So talk about the rationale behind the taking back the distribution from agents. There is 2 effect. I'm not going to talk about specifics, but the general terms and condition in the industry for distribution to, directly to a multi-brand wholesaler is retail price minus 40%. That's a good average for the industry. What you usually give to an agent is retail price minus 65% or 70%. So by doing a quick calculation, you can see how much additional revenue and margin the direct model allows, especially in sort of a well-positioned market like Asia and Japan. Of course, with that comes the need to have your own team and your own people in the country. In some country, that whether we -- again, we always have a subsidiary in Japan, so it's not going to be very expensive for us to put together the team that is going to service the wholesalers in Japan. And some other markets, we didn't have a subsidiary and we had 2 of them, as we've announced, a sales office in Hong Kong and sales office in Miami. They are reasonable sized office with small teams. So they're are not very expensive, but they add on to the SG&A thing. So that is the direct impact of changing the model on the P&L. The second thing is that, you know when you are very high-end luxury brand that you're not going to be the key priority of your agents or they're more likely to use your name to position their business. And they are not going to focus on developing the brand and pushing the revenue as much as our own people could do. So this is the second effect, is that we expect a much better visibility and much better growth rate in the markets where we act directly because we will have people that are focusing on this one brand instead of being part of the brand portfolio serviced by multi-brand agents' staff, if you want. So that's the key elements taken into consideration to understand the impact of all that. And the second part of your question was?

Oliver Chen - Citigroup Inc, Research Division

Regarding SG&A and the near-term deleverage, if it's going to outpace revenue growth in terms of how we should model it in Q4 and next year.

Cyrille Baudet

What you can see in Q3 is that we had the growth of SG&A that was above growth of sales. But it was not above growth in margin and that's really the deal here. I mean, the need for additional SG&A comes from the shift that we're trying to give to the product mix on the sales revenue. So as a rule of thumb, again, the top of ourselves, our entrant [indiscernible] from one quarter to the other, as a rule of thumb, what we would like to see is that the growth is, in SG&A, doesn't outpace the growth in margin dollar.

Operator

And our next question comes from the line of Des Kilalea from RBC.

Des Kilalea - RBC Capital Markets, LLC, Research Division

Bob, a couple of questions on A-21. As I understand that you would have been starting to spend quite soon in A-21? And in the deferral, would you look at maybe a different mine plant, would that be new envisaged as a new idea then? And you probably can't answer this, but have you any idea how long it might be deferred before we should kind of be thinking about you spending your share of the capital? And then maybe a question for Frédéric on China. Is there any evidence yet of which way the new leadership in China is leaning towards it's view on luxury sales. I mean, we saw them canceling red carpets and lavish lunches and stuff like that and that may just be kind of bad noise, but do you have any idea how these new leaders would lean towards luxury?

Robert A. Gannicott

Frédéric, why don't you take that one first and then I would take the status on the mining.

Frederic de Narp

So on the Chinese side, it's very difficult to say. We only have 2 salons in Shanghai, 1 salon in Beijing. We don't have wholesale platform as we are gaining back, to control our own destiny in mainland China. Then we're going to get started starting now basically, this month of November, our own distribution in mainland China. So we don't have a large distribution to tell you about that. What we've seen though is that we can really much judge the spending of Chinese that travel around the world, and it seems very, very good and it seemed very good at all levels. It's a large majority of the sales of bridal rings we sell from our London salon. In the new Harrods salon, we see Chinese importantly -- the Chinese have multiplied by 20, representing 5 years at Harrods, London, so -- and it continues. So Chinese traveling around the world, and are exponentially -- the number of Chinese traveling is exponentially growing every year. As you know, you have more than 70 million, 80 million Chinese traveling now every year. So this is going to continue. Locally, we are just monitoring the sales of our salons, which is a good satisfaction for beginning for first year. We have some high jewelry sales, we have lots of bridal sales. Overall, it is a good departure. It's a good beginning in China, but I cannot answer properly your questions after the government, after the change of government here.

Robert A. Gannicott

Let me deal with the A-21 then. At the moment, the CapEx for A-21 as seen is about $500 million. It has to do with a full dike in the same manner that we've done with dikes around the other pipes. It doesn't need to happen because of the extensions that are being discovered -- or not discovered, the extensions that are being delineated, really, for the other pipes, particularly at depth. It does give additional production there and that means that we don't strand A-21 for at least another 3 years. At the moment -- in the plant at the moment, I mean, there is a minor amount of work being spent this year to prepare for rock crushing. One of the ways of saving some money in A-21 is that because of the crushing capacity that was installed with respect to base plant, that was contemplated but not used, there is excess crushing capacity there. And so as long as there's a generous amount of time, the required engineered crushed rock products that are needed for the dike construction can actually be done on-site without having to bring in a temporary crushing setup and a contractor to operate it. So some preparation for that is going to take place this year, but it is really not -- it's only, I think, $11 million or something like that. They're probably -- the decision that's being -- it still sits in the mine plant that's being made late this year. I simply believe that it's a fair way to represent this, with Rio Tinto also looking to sell their diamond business, and the time that is likely to take for them to achieve that. But the decision is likely to be made by a new owner and not by Rio, frankly, because there isn't a necessity to do it now, so I don't think they're going to step into a new capital project if they don't really have to. So on that basis, I see basically the decision being deferred to 2014, which is the other part of your question.

Operator

And our next question comes from the line of Brian MacArthur from UBS Securities.

Brian MacArthur - UBS Investment Bank, Research Division

So just a follow-up on that, you make a comment that A-21 was deferred because of finding more ore but also the diamond market. But based on your last comments, it sounds to me -- let's ask the question this way, if the diamond market was better, would it still be deferred. It sounds like it probably would've been?

Robert A. Gannicott

Yes, I think so, probably, Brian. Just because of the necessity isn't there to do it. You don't want to leave this thing stranded as the last source of production on the property. You need to be doing it along with other things. Unless of course in the fullness of time, unless it gets linked up with Ekati or something like that, where all of a sudden that gives you a lot more flexibility. But as currently seen, as a standalone operation, it can be deferred. So in a time when the capital demands for other projects, and all of the large mining companies, as you know, are under quite a lot of question and the diamond market still not really back on it peak to the extent that we can take a reliable look into the future, I think. I think we're still in a period where there are some factors that could go either way.

Brian MacArthur - UBS Investment Bank, Research Division

As we think of it this going forward, when you say keep the mill full by these new extensions, I mean, we are still not filling it at 2.1 million tonnes or whatever going forward. These new extensions, are they at least going to still keep it like in the old mine plant at 1.8 million tonnes every year?

Robert A. Gannicott

Well I think that becomes the question, but we still don't really know what the real limits of underground production are. Although the plan is for 1.6 million tonnes mined from underground next year, the target production for the internal group here is 1.8 million. And I think we really haven't operated the underground mine on a stand-alone basis in the good solid rock, as opposed to a nasty ground right underneath the old bed of A-418 for instance. I think we need to get ahead of this before we really can determine the ultimate capacity of the underground mine. But there are now 3 haul objectives from the mine, the haulage was clearly going to be the bottleneck. So I think there is -- we can be optimistic that there are still going to be more than 1.6 million tonnes coming out of the underground mine, but it has to be demonstrated.

Brian MacArthur - UBS Investment Bank, Research Division

Because I guess, that's what -- if I look back to the original mine plant for next year, you sort of had the 0.7 million tonnes from 154 north, that's consistent. It looks like -- I don't know if it rounding, it's a little better on 154 south, but then in A-418, it looks like it's cut from 0.65 to 0.4 million tonnes and yet we talk about how things are going better than expected at A-418 from kind of -- if things are going better underground than you thought, I'm surprised that we actually take it down in the near term as opposed to going the other way.

Robert A. Gannicott

Yes. But it's because of the -- that's really because of being able to have access to more 154 side ore than was expected and it's higher value. So you're always going to go for the higher value ore, as long as it is consistent with keeping the eventual closure date together properly. So it is really a question of displacing some ore because 154 south is doing better actually than the plan suggested.

Brian MacArthur - UBS Investment Bank, Research Division

Right. But with excess capacity of the mill, why don't you just do both?

Robert A. Gannicott

Because you're not sure that you can actually hold that much from underground.

Brian MacArthur - UBS Investment Bank, Research Division

Okay. So it's really -- it's a haulage thing. So again, I guess, I'm going to go back to the main -- I mean, the original mine plan we got when it all came out. I mean, we basically got to reconstruct this again to some extent, delaying A-21 and then making some decision about how all this stuff is going to ramp up. Is that fair?

Robert A. Gannicott

Yes, I think that is fair. I mean, I would just here again say that this plan -- I just picked this up from a joint venture meeting here in Yellowknife 2 days ago. It is not yet even being blessed by Rio Tinto in London and this ore is happening in the context of Rio Tinto looking for a buyer for their diamond business. So this is not exactly a stable platform at the moment.

Brian MacArthur - UBS Investment Bank, Research Division

And just with this whole thing going on, is there any -- I mean, for exploration looking for other pipes on Diavik property, is there anything coming up for that next year or just with this uncertainty, is there going to be nobody looking for anything next year on...

Robert A. Gannicott

The exploration -- the smaller exploration budget that there is for next year is really devoted to getting all of the information in absolutely tidy, readable, cross-referenceable form. There's no real physical work going on there. We on the other hand are undertaking an exploration program on the brand that we've acquired, for the Southwest of Diavik, along the trend from the Misery and the Diavik pipes. And we are actually launching a serious overburden sampling program there starting in spring.

Operator

[Operator Instructions] And your next question comes from the line of John Richmond, JPMorgan.

John Richmond

I have 2 quick questions for you. The first one is you mentioned in the release last night that you're expecting slower growth in the near term, which will impact the holiday season. I was wondering if you could share a little more color about what's driving that, maybe in which geographies you're seeing a change in sales trends? Is it mainly Hurricane Sandy related in the U.S. or have you seen your consumer chains or spending patterns around the fiscal cliff?

Robert A. Gannicott

Over to you, Frédéric.

John Richmond

And then I have 1 follow up.

Robert A. Gannicott

Frédéric, hello?

Frederic de Narp

Yes. The comments are more for the industry because these are the industry comment coming from all over the part of the luxury world, the high jewelry world, the fashion world. As far as we see the trend concerns for us, we continue to see a robust trend on our core and access business, in line with the trend we've seen in the last 9 months.

John Richmond

And then as far as tourists sales are concerned, can you share just a little more color on what the trends there look like. Have you seen any change in the strength of your tourist sales or has the mix of countries, is that your -- the tourist sales are a coming from changing?

Frederic de Narp

Yes, we continue to see, I mean, the tourism is the most positive element that is existing today and will exists for the next 10 years to come in the industry. I talked about Hawaii, Las Vegas, I mean, people travel and travel more. You have 43 million new tourists every year in the world and these tourists, most of them 60% some statistics say, I'm not an expert, but the majority of them are spenders because they have some network. So it's the most exciting thing on earth because for our brand that has the reputation to be the most exclusive brand in the world for Harry Winston, people fly to you more easily. And this is what we see, so -- what the reason for us is that we have existing salons located in many tourist locations, these nations, Hawaii or Las Vegas, that benefits greatly from that, helping us having organic sales and organic growth from the existing salons. In the case of London, that is booming this year, the salon we opened 4, 5 years ago, but this year has boomed. So basically, we see the flow of tourism accelerating coming from Japan, from China, from Russia, from Brazil and from Nigeria as well.

Operator

There are no further questions, Sir.

Robert A. Gannicott

Okay, thanks very much. Thank you, all, for listening to us. If you want a follow-up, of course, I think most of you know where to find me, but there's also Richard Chetwode, Laura Kiernan and Kelley Stamm, available in various locations throughout the world. If you want to call them or email them afterwards, they're very happy to deal with any follow-up. Thanks very much.

Operator

Thank you, ladies and gentlemen. That concludes your conference call for today. Thank you for joining us and you may now all disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Harry Winston Diamond's CEO Discusses F3Q 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts