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Executives

Robert Gannicott - Chief Executive Officer

Alan S. Mayne - Chief Financial Officer

Analysts

Irene Nattel - RBC Capital Markets

Edward Sterk – BMO Capital Markets

Adam Reisen - Chilton Investment Company

David Christie - Scotia Capital

Tanya Jakusconek - National Bank Financial

Harry Winston Diamond Corporation (HWD) F3Q10 Earnings Call December 9, 2009 4:00 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the Harry Winston Diamond Corporation’s fiscal year 2010 third quarter conference call. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

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 OSC and SEC filings.

I would now like to turn the presentation over to your host for today’s call, your Chairman and Chief Executive Officer, Mr. Robert Gannicott. Please proceed.

Robert Gannicott

Thank you. Well, good afternoon, ladies and gentlemen and welcome to the Harry Winston Diamond Corporation's third quarter earnings call. You will have noted in our press release of last week that Mr. Frederic de Narp has been appointed to succeed Tom O'Neill as the Chief Executive for Harry Winston Inc., our jewellery and watch subsidiary. Frederic will not join us until the new year, so myself and Alan Mayne, our Chief Financial Officer, will address the retail results during this quarter.

The third quarter ending in October 2009 was characterized by the flow through to rough diamond sales of the production constraints on the mining side of the business which resulted from a summer shutdown, ameliorated by substantial improvement in rough diamond prices and a retail sales increase in the Far East, including Japan, of 53% over the third quarter of the prior year.

Margins in the retail business improved significantly as overheads are reduced and the sales mix trended to higher margin sales in [Ieda].

I am now going to turn the call over to Alan Mayne, our Chief Financial Officer, to discuss the financial results in more detail, before returning to discuss the outlook for both mining and retail.

Alan S. Mayne

Thank you, Bob and good afternoon. The company's consolidated results for the third quarter reflect the continuing impact of the unsettled global economy on the sectors in which we operate. However, while consolidated sales and earnings from operations declined significantly from the same quarter last year, the loss from operations was significantly lower than in the first and second quarter of this year. Our foreign currency exposure has a material influence on our reported earnings. During the third quarter ended October 31, 2009, the Canadian dollar weakened slightly against the U.S. dollar. This resulted in a $1.6 million foreign exchange gain in the quarter, compared to a net $49 million foreign exchange gain in the same period last year.

Taking into account this foreign exchange gain, our interest expenses, other income and expenses, and income tax recovery, we reported a small net loss of $214,000, or break even on a per share basis, compared to net earnings of $71.9 million, or $1.17 per share, in the third quarter last year.

Now let me spend a few minutes on the financial review of our mining and retail segments. As highlighted in our results release earlier today, rough diamond sales for the quarter decreased considerably from the same period last year, resulting from a combination of a 75% decrease in carats sold and a 9% decrease in rough diamond prices. Rough diamond production during the quarter was significantly lower than in the same quarter last year due to the planned summer shut-down at the Diavik Diamond Mine, which reduced goods available for sale. Accordingly, the company held only one rough diamond sale in the quarter compared to three in the same period last year. Rough diamond prices continued to increase over the second quarter of this year but remain lower than prices achieved in the third quarter last year.

Retail segment sales decreased to $54 million from $57.9 million in the comparable quarter of the prior year. This comparable period sales reduction of 7% was significantly smaller than the reductions experienced in the first and second quarter of this year. Notwithstanding the reduction in sales, the retail segment was almost break-even on an operating profit basis in the quarter as a result of higher gross margin and continued reductions in SG&A expenses.

The cost reduction initiatives taken in response to the global economic crisis are aimed at delivering a higher level of sustainable profitability during the anticipated economic recovery.

Now let me turn the presentation over to Bob to discuss the retail business in more detail.

Robert Gannicott

Thanks, Alan. Well, turning first to the retail business then, as we progressed through the third quarter, overall sales strengthened on a consistent basis. There are some signs that the worst of the global economic downturn is over, although consumer demand for high-end luxury products remains uneven geographically. Improving economies in Asia stimulated consumer demand for luxury retail products in those markets. However, the U.S. market remained a challenge.

The retail segment's decline in sales of 7% over the comparable quarter of the prior year represents a significant improvement over the two previous quarters. Asia, including Japan, generated sales of $20 million, a 53% increase over the prior year. Our new salon in Singapore has performed very well, as we expected.

Asia continues to be a very important market for our business, one that will be a major focus of our future growth plans.

Europe generated sales of $21 million during the quarter, representing a decrease of 10% over the prior year period while sales in the U.S. of $13 million were down a full 40% compared to the prior year.

Gross margin, however, grew from 46.4% in the comparable quarter in the prior year to 53.9% in this past quarter. This increase was driven by the strength of our business in Asia relative to overall sales and the mix of products sold.

Associated with the introduction of new products and more modest price points, we have seen increased unit and dollar sales, as well as margin improvements.

During the quarter, we successfully launched the New York collection by Harry Winston, a series of jewellery [tie pieces] inspired by the glamour and architecture of some of New York's landmarks. The collection, which was officially launched in September at our New York salon, has been positively received by our customers. In September, we redesigned our website to present a broad assortment of jewellery and watch product. The website provides the ability for clients to make appointments with salons, which is proving to be a popular feature with customers.

In our watch business, the Harry Winston Opus 9 has been awarded the prize for the best watch design of the year by the jury of grand prix [au laugerie]. The grand prix [au laugerie] and [dejener] is the most recognized award ceremony within the watchmaking industry. This award once again supports the creativity, quality, and fine craftsmanship of our products.

We are cautiously optimistic about the holiday season. Although significant economic challenges remain in the U.S. market, high-end luxury consumers are reappearing. Their priorities are exclusive design, fine materials, and a positive customer experience. During these challenging times, our strong brand, global profile, and concentration on core strengths of craftsmanship and creativity will allow Harry Winston to emerge from the current economic climate in a strong position.

Turning then to the mining side of our business, the turmoil of the last year has focused all diamond producers including Diavik on efficiency and cost reduction. This single sale quarter was an appropriately cautious response and common with other diamond producers to conditions without historical precedent in the diamond market. In the event it underestimated the strength of Asian demand in the face of economic shock that was most severe in economies of America and the U.K. The result has been a surprising rebound in rough diamond prices as retail sales in Asia continued to increase.

Although trading conditions in the U.S. remain challenging, we do now see some beginnings of improvement in this market as the holiday season gets underway.

The Diavik mine next year is expected to produce around 7.8 million carats of diamonds from 2.1 million tons of processed ore. Production costs will remain high as open pit production is supplemented by early underground production. The modest underground tonnage next year will be from in-ore development work, which is abnormally high costs as scoping areas are prepared for full scale underground production.

Looking beyond next year, the focus will be on keeping the processing plant fully utilized while reducing costs. The details of the plan to achieve this will involve experiences gained with both underground mining and the [inaudible] recovery for the bulk of the A154 [sand] open pit.

Rough diamond prices have continued to rise since the spring of 2009 and are now about 13% below their highs of last year. Although we would expect jewellery sales in the U.S. to grow only modestly through 2010, mine supply will remain constrained as mines pass their production peaks and no new major sources of supply appear to replace them. This implies continuing price rises in the near-term, increasing in velocity as the U.S. economy recovers.

On our next quarterly reporting event in March, we look forward to introducing you to Frederic de Narp. In the meantime, we wish you all a good holiday and start to the new year and with that, we are also prepared to now deal with your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Irene Nattel with RBC Capital Markets.

Irene Nattel - RBC Capital Markets

Gentlemen, I was wondering -- in conjunction with the change in management in the retail segment, are you going to go through a strategic assessment and maybe rethink a little bit the positioning of the brand, whether you would be ready to for example expand the product offering, perhaps go more broadly into third channel distribution, expand watches and obviously I'm just throwing out a few ideas but is this all on the table at this point?

Robert Gannicott

Well, certainly some of those things are on the table. The ones that are more appealing are some -- certainly some more modest price point merchandise. We could sort of use Japan as a bit of test bed for that, Irene. And in fact we've been very successful in Japan over the last year during a year when most of our peers have still struggled there. And we certainly attribute that to a revised product offering, which made it more accessible to a broader range of the population. And with that success, we are looking to basically develop more of a bridal business in the U.S. Compared with our peers in the U.S., we have a very small proportion of our traditional business was simple bridal and we believe there is a good opportunity for us there. And as you may have noticed, if you looked at Frederic de Narp's history, he was very successful in growing that kind of business for Cartier in the U.S., so certainly that's on the table.

I don’t think we want to get too -- you know, we certainly -- third channel distribution brings a lot of other perils with it. It's a relationship that can be entered in haste and can last -- could be a hindrance for a very long time but we are certainly looking at much more aggressive expansion in China. We put Hong Kong and Beijing there just over a year ago. They both have been successes and so we are certainly ready to march on out from there and into other Chinese locations.

So yes, there will be a strategic review, if you like. I mean, it's really just bringing the experience and the expertise of Frederic to bear on this brand.

Irene Nattel - RBC Capital Markets

And just continuing in that vein, Bob, you know, certainly again if we look at Cartier, they've had a great deal of success not only in moving sort of to lower price points but also in extending the brand into, for example, accessories or writing instruments. And yet at the same time, retaining a lot of that prestige positioning and wondering whether you could see a day where Harry Winston might contemplate those kinds of things.

Robert Gannicott

There is certainly a day when it would. I mean, we do actually make some writing instruments today, if you -- I mean, we have been selling those for a while. Obviously our watch business represents an extension of the image that was created in the jewellery business and we certainly see the watch business here again as being a platform that we could quite readily expand, as did Cartier, of course.

Irene Nattel - RBC Capital Markets

That's great. And just finally, you say that you are cautiously optimistic on the outlook for the U.S. in -- for the holiday season. Could you provide a little bit more color around what cautiously optimistic means for you?

Robert Gannicott

Well, certainly our New York store has been -- frankly has been very tough for the whole year, including November really, with some sign of life in October, even November but certainly noticed in this first week of December that things -- I mean, it could be just an anomaly, one should never take a kind of a week sales -- one week of sales and start projecting it out into the future but it has certainly been significantly better than perhaps we might have projected for that, the early start to the season.

And I get the feeling that other people are experiencing that in a similar way. But I don’t think -- I think we'd all be crazy to sort of think that we are suddenly going to switch the lights back on completely in the U.S. in the space of a month or so. This is clearly going to be a road out to recovery that is probably going to go on for several months if not the full year.

Irene Nattel - RBC Capital Markets

That's great. Thank you very much and I'll get back in the queue.

Operator

Your next question comes from the line of Edward Sterk with BMO Capital Markets.

Edward Sterk – BMO Capital Markets

I just have a couple of questions -- the first one is the usual challenge of trying to put a pin in [realized prices] at Diavik. I get the feeling that I might be underestimating them, so could you talk a little bit around the change in inventory between last quarter and this and also the mix of products sold?

Robert Gannicott

Yes, we're not really holding any -- Alan, perhaps you could address that with more accuracy.

Alan S. Mayne

Yeah, I mean, I think as you know, it's difficult for us to try to get you to land on the perfect square of carats sold in the quarter. I think what we can say is if you look at the movement in inventory and you take one sale, I think it's fair to say we sold less than what was produced in the quarter. I think that's as far as I'll go there. I mean, I think -- I don’t know what you had in your model for a cost per carat in inventory at the open of the quarter. Obviously the cost per carat in inventory at the end of the quarter is much higher as a result of the shutdown. But I think if you look at that and accept that we sold less than what was produced in the quarter, that may help you. Again, I don’t know where you were in terms of an expected achieved price in the quarter and whether or not that helps, recognizing again the constraints we have about trying to get you to land right on the spot of carats sold and then hence achieved prices.

Edward Sterk – BMO Capital Markets

That's all right, I understand the limitations here [with trying to explain that]. Was there a sort of a particular mix of products sold or was it just [inaudible]?

Robert Gannicott

No, it was ore sourced as we say from 154 South and 418 -- no unusual anomalies in the mix other than what comes out of the mine and what we normally sort and sell to our usual clients.

Edward Sterk – BMO Capital Markets

Okay, fair enough -- and then my second question is I was just wondering what position Tom O'Neill has moved into.

Robert Gannicott

Tom has sort of -- we've had a sort of contract period with Tom and so I think Tom is going to take a little time off before he -- he lives in -- he and his family live in Paris. I think he's looking forward to taking a bit of a break, first of all. So I'm not sure where he is going to land after that.

Edward Sterk – BMO Capital Markets

Okay, sure, fair enough. I think that's probably it for me right now.

Operator

Your next question comes from the line of Adam [Reisen] with Chilton Investment Company.

Adam Reisen - Chilton Investment Company

I was just curious to try to get a little color around this 9% year-on-year decline in diamond prices -- is that meant to refer entirely to a decline in market prices of diamonds or does that reflect any change in the products that you guys are selling from 418 and 154?

Alan S. Mayne

It's purely market.

Adam Reisen - Chilton Investment Company

Okay. Thank you.

Alan S. Mayne

Yeah, I mean, I think Bob mentioned at the outset about diamond prices. I think as we said in the release, their prices were down -- let me back up. You -- in the first quarter, prices hit -- I think they were at the lowest point since the mine started operation and we have experienced consistent and robust achieved price increase from the first quarter right through to the early indications from the sale we are having as we speak, so the rough diamond market has turned. The decline we are talking about is quarter over quarter, so compared to the average achieved price in Q3 last year to the average achieved price in Q3 this year, that metric is down 9%.

Adam Reisen - Chilton Investment Company

Yes, understood.

Robert Gannicott

Just to add to that, it may help you a little bit if we said that from the low point, I was just looking at some figures that Ray had her -- from the low point we're up 61%. Our sales price is up 61% from the low of last January, I think it was, February.

Adam Reisen - Chilton Investment Company

Okay. Very good. Thank you.

Operator

Your next question comes from the line of David Christie of Scotia Capital.

David Christie - Scotia Capital

I just wanted to chat a little bit on what the underground/open pit mix will be for the next year. Do you have any sort of numbers you can throw at me?

Robert Gannicott

Yeah, we do. Alan's got --

Alan S. Mayne

Yeah, in terms of --

Robert Gannicott

I think it's about 700,000 tons from underground.

Alan S. Mayne

Yeah, 700,000 --

Robert Gannicott

For a total of 2.1 million.

Alan S. Mayne

That's right -- 2.1 million tons of ore processed, 700,000 from underground, 1.4 from open pit. In terms of the open pit, you know, about 1.25 of that is going to come from 418 with the balance from 154 South. Underground, it's about 600-and-some-odd-thousand 154 South with the balance in 154 North.

Robert Gannicott

Just a little more color on that then -- the 1.4 ore is actually taking the [crown pillar], instead of leaving it to the end of the mine life and then taking it at the end. You can take the crown pillar out right from the beginning and of course recover it from underground holdage and then replace it the crown pillar with a concrete cap, a concrete crown pillar in fact.

The underground tonnage, one of the reasons that the costs are high this year is because the underground tonnage [is essentially all from] development [muck]. It's -- in other words, these are not big stoping areas that are being efficiently mined. This is actually the completion of the access headings into the stoping areas but because of development in ore, it goes to the mill. So that's quite expensive underground muck compared with the way that normal mining will progress.

David Christie - Scotia Capital

Okay, and do you have a lot of development yet to do underground before you get to really -- to that full tonnage? Are we going to go right into that in Q1?

Robert Gannicott

This is really work, you see, that wasn’t done at the end of last year because of the capital constraints, so that's it -- this is -- by the time you get to the end of this year, we are in full scale stoping.

David Christie - Scotia Capital

Okay, good. And --

Robert Gannicott

Just to be perfectly candid about that, I mean, obviously development work goes on throughout the life of the mine, as you know.

David Christie - Scotia Capital

Yeah, yeah, yeah.

Robert Gannicott

Right, okay.

David Christie - Scotia Capital

821 -- you mentioned in there you are still working on this different mining method. What is the status on that and when we do we expect to hear about that?

Robert Gannicott

We are going to do a pre -- they are doing a pre-feasibility analysis now, which I think will be finished by mid-year, wasn’t it? Yeah, mid-year. That's a pre-feasibility analysis. Then we go to the kind of plus or minus 10% full feasibility after that.

David Christie - Scotia Capital

Okay. And so that $45 million you guys mentioned was all the CapEx you guys have to contribute this year, that's it?

Robert Gannicott

Yes, correct.

Alan S. Mayne

Well, it's for this year and then next year it's $54 million and of that, about $25 million is to essentially complete the underground.

David Christie - Scotia Capital

Okay, perfect. Thanks, guys.

Operator

Your next question is a follow-up from Irene Nattel with RBC Capital Markets.

Irene Nattel - RBC Capital Markets

Back to the retail business, just wondering what your thoughts are at this point on how many salons you might open next year.

Robert Gannicott

Well, at the moment we've got approval -- we were planning to do -- we are planning to do one in Shanghai. I think Frederic can't, because of his non-competition agreement with Cartier which he's got to work out, he's got to finish, I mean -- he doesn’t really -- he doesn’t come to us until January the 4th and obviously yeah, we are going to do Shanghai. The schedule beyond that, I mean, we are going to take a couple of months with Frederic, go over there and visit and so on, and then make some decision about whether we do this entirely on our own, as we have done with our existing Beijing location and plan to do with Shanghai, or whether we seek to involve a local partner of some sort.

So I can't really give you a sort of schedule for salon openings but put it this way -- I don’t think you should -- you shouldn’t expect to see any salon openings really in the next two years, I don’t think, that are not in China.

Irene Nattel - RBC Capital Markets

That's great. And then just on the whole diamond market more broadly defined, I mean, you did mention New York as being particularly difficult. If you could talk about where you are seeing pockets of strength from, a customer base sales. Is it really all coming from Asia and the Middle East? Are you starting to see the Europeans coming back or is that lesser decline coming from Europe really just Asians and Middle Easterners?

Robert Gannicott

Well, certainly the far east has sort of been the great fun in this business last year but one of the groups that have sort of started to return are the Russians, as well as the Middle Easterners certainly are a significant pick-up in our store in Paris over the last couple of months. A lot of that is Russians, and even our stores in Southern California are signed to some Russian customers, although these are people who are not really based in the U.S. They are people that are really based in Europe, so yeah, I mean, certainly in China and you may have noticed, or maybe someone has pointed out to you that if you look at the -- beside the auction sales of large jewellery items, Christies, Sotheby's, for instance, an awful lot of them are being purchased by private customers that are based in the far east, so yeah, I mean, China -- all of the other -- we've been selling to people in Vietnam, for instance. Our business in Taiwan has been good. Russians reappearing in Europe, Middle Easterners reappearing in Europe. I think that would probably be a pretty good summary of the bright spots.

Irene Nattel - RBC Capital Markets

That's great. Thank you.

Operator

(Operator Instructions) Your next question comes from the line of Tanya Jakusconek of National Bank Financial.

Tanya Jakusconek - National Bank Financial

I just have a couple of questions. I'll start on the mining aspect. I read in the press release that Rio Tinto is redoing another, a new mine plan. And when can we expect that? They usually put it out in March -- is that still the timing?

Robert Gannicott

Well, the mine plan for the next 12 months, the next calendar year, is really before us now and those are the numbers that we were giving you in both the press release and the --

Tanya Jakusconek - National Bank Financial

Yeah, the 7.8 -- kind of wondering that long -- you know how they provide us always a long-term mine plan with all the tonnages and the pipes that they will be accessing?

Robert Gannicott

Right, that's the one that -- they really want to get the experience of how the underground mining is actually going to perform. I mean, there's obviously some optimism that it might perform better than the current plan but there's also a -- you know, who knows. You go underground, they will certainly learn things, put it that way.

Also, the other key thing is the experience of the recovery of the crown pillar for the bottom of the 154 South pit because if that goes as well as we hope it does, then it opens the possibility of doing the same thing in the bottom of 8418 and if we could do that, it would even shorten the open pit mining by a year, which it would reduce the amount of waste stripping that has to be done for it to mine the remainder of the 418 open pit resource. And so we'd be able to get rid of the mining [fees] a year earlier, so as you can see, with all the other sort of variables, it's a -- that's a good reason for not trying to tackle a full life mine plan, and particularly of course the other item is 821, where the -- first of all, the feasibility of mining it with this different method that doesn’t require a fully hydraulic dyke, needs to be investigated at pre-feasibility level. Then the final feasibility level will put a schedule and a capital cost estimate and operating cost estimate on it.

So all of that stuff needs to be resolved during this year.

Tanya Jakusconek - National Bank Financial

So would it be fair to say then it will be in the latter part of next year that we might get that life of mine plan?

Robert Gannicott

That sounds reasonable.

Tanya Jakusconek - National Bank Financial

Okay. And then just on the -- you know, going -- maybe Alan, on the capital spending, once we've gone through next year, which you've given us guidance for, then is the sustaining capital still reasonable at $40 million per annum on a 100% basis?

Alan S. Mayne

Yes, that would be entirely reasonable.

Tanya Jakusconek - National Bank Financial

Okay, and then after that, just on the -- back up to the quarter, can you let us know how many shipments you had in terms of maybe what, how many carats were shipped?

Alan S. Mayne

Well, the production was 331,000. We received more than that and we sold less than that.

Robert Gannicott

But not much more.

Alan S. Mayne

Yeah.

Robert Gannicott

But close to that.

Alan S. Mayne

I mean, you understand I can't be more precise than that but -- so again, 331, we received more than that and we sold less than that.

Tanya Jakusconek - National Bank Financial

Okay then, maybe another way of asking would be generally if you look at Antwerp and you look at the prices that are being seen in the rough market in Antwerp, which currently we've seen in the sort of low 80s per carat, would that be reasonable to assume that you would be receiving something in that order?

Robert Gannicott

No, it's higher than that.

Alan S. Mayne

Yeah.

Robert Gannicott

It's higher than that, Tanya.

Tanya Jakusconek - National Bank Financial

Okay. And then my final question is just on the retail, just coming back to the -- you know, you mentioned modest price points have done very well. What would you consider a collection of modest price points? I guess we all have what modest is in our minds.

Robert Gannicott

Well, yeah -- sort of $3,000 to $15,000 units have been doing well in Japan, and even higher ones than that. But we certainly had a lot of success with -- and of course [we had higher margins] on those pieces.

Tanya Jakusconek - National Bank Financial

So is that sort of where the New York -- I'm sorry, I didn’t look at your New York collection.

Robert Gannicott

No, the New York collection is in general higher than that. There actually remember when there's one set of ear studs that are in that kind of range but most of it would be above that.

Tanya Jakusconek - National Bank Financial

Okay, and then sorry, I forgot to ask about the ice road that I guess we are coming in for the preparation -- does everything -- I mean, I haven’t been checking the temperature up there but do we look like everything is set for --

Robert Gannicott

Yeah, there was a good early freeze, which is always the helpful thing there. The other helpful thing frankly is that even with all the three operators up there, this year there is only 3,800 loads to go up in total, so it's -- compared with other years when we've done as much as 10,000 loads, so --

Tanya Jakusconek - National Bank Financial

Sorry, what were the loads this year that have to go up?

Robert Gannicott

3,800.

Tanya Jakusconek - National Bank Financial

Okay.

Robert Gannicott

That's not all for us -- we're only a part of that but it's because everybody in that product constraints and therefore don’t need the same amount of fuel to be redelivered and other consumables, so the ice road only has to operate for about three weeks to get that done, so they --

Tanya Jakusconek - National Bank Financial

Okay.

Robert Gannicott

-- leave it to February when --

Tanya Jakusconek - National Bank Financial

So February, so monitor the temperatures I guess through February as we -- yeah.

Robert Gannicott

It's the temperature that happens in January that is the important thing now.

Tanya Jakusconek - National Bank Financial

Okay. All right, thank you so much.

Operator

You have a follow-up question from the line of Edward Sterk of BMO Capital Markets.

Edward Sterk – BMO Capital Markets

I was just wondering, [I've actually asked a retail segment] question here -- [inaudible] Frederic hasn’t come on board yet, but what are the chances of some rationalization of the portfolio salons in terms of [not for say any new ones] but potentially closing some under-performing ones?

Alan S. Mayne

I think the question was what do we think of a rationalization of the salon network and perhaps closing some?

Robert Gannicott

No, I don’t think any of them are -- none of them represent any sort of financial impairment at the moment. I mean, obviously with times being as slow as this, what we will do likely though is not offer the complete range of product in all of the stores. I think that's a likely change -- in other words, we only offer the full range or the very serious high-end pieces at a set of flagship stores that represent the core geographic areas. And in the smaller stores that are more sort of sprinkled around both the U.S. and the rest of the world, we would offer a -- the lighter kind of range of jewellery, the lower price point, an intermediate price point.

Alan S. Mayne

And that's essentially what we do in Japan. I mean, we have the umbrella brand from Harry Winston but it means something different to people in Japan and we think we have a very good business model there in terms of product price promotion and positioning and so I think it would be looking to sort of tailor that as Bob said to the remainder of the network.

Edward Sterk – BMO Capital Markets

Okay, fair enough. And then I guess the only other question left to ask, and I think you actually already mentioned this, but I didn’t quite catch it, was the pre-feasibility study on the 821 [kimberlights]. Is that due next year?

Robert Gannicott

Yes, we expect the middle of the year.

Edward Sterk – BMO Capital Markets

The middle of the year.

Robert Gannicott

It's the study that goes in between the scoping study and the final engineering study. It's not the final engineering study but -- yeah, so it's

Edward Sterk – BMO Capital Markets

And what --

Robert Gannicott

-- [point is better to proceed] to final engineering.

Edward Sterk – BMO Capital Markets

And was I correct in hearing that your costs for that were around [inaudible] attributable?

Robert Gannicott

For the feasibility study?

Edward Sterk – BMO Capital Markets

For the pre-feasibility study.

Robert Gannicott

No, that's high. I thought it was about $4 million but I can't -- that's just off the top of my head.

Alan S. Mayne

I thought it was [$60 100%].

Robert Gannicott

We're not --

[Multiple Speakers]

Edward Sterk – BMO Capital Markets

Sure. Okay, thanks once again. I think that's it for me.

Operator

You have a follow-up from the line of Irene Nattel of RBC Capital Markets.

Irene Nattel - RBC Capital Markets

Alan, I noticed that the merchandise inventory in the retail segment is really unchanged from prior quarter and I was wondering what you were thinking around merchandise inventories, whether that's an area that you'd really like to get at in terms of working capital improvement?

Alan S. Mayne

I think we have, Irene. If you look from last year and I wonder if I actually have --

Irene Nattel - RBC Capital Markets

Yeah, no, I mean, it is down from last year but quarter to quarter, it's been relatively stable.

Alan S. Mayne

Yeah, I think -- you know, we have taken a lot out. I think it's down considerably year over year. I think we are comfortable with the liquidity position of the retail business right now. I don’t know if we would -- you know, especially if we are looking at an up-turn globally. I don’t think we -- there is no need for us to go and pare back the inventory further. I think what we would do is meet with Frederic, review the inventory, the composition thereof and determine are we aligned appropriately for the network. But I don’t see us dramatically reducing the inventory and I think given where we started and given where we are at represents quite a good source of working capital cash, so I think we would be cautious about further reducing.

Now, if the economy doesn’t pick up and there is another dramatic turn down, obviously we would then revisit costs again and investment in CapEx and working capital.

Irene Nattel - RBC Capital Markets

That's great. Thank you very much.

Operator

There are no further questions at this time. I would like to turn the call back over to Mr. Robert Gannicott. Please proceed.

Robert Gannicott

Okay, well, thank you very much all and have a good holiday.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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Source: Harry Winston Diamond Corporation F3Q10 (Qtr End 10/31/09) Earnings Call Transcript
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