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Executives

Frederic de Narp – President and CEO, Harry Winston, Inc.

Robert Gannicott - Chairman & CEO

Alan Mayne – CFO

Analysts

Irene Nattel - RBC Capital Markets

Des Kilalea – World Bank

David Christie - Scotia Capital

Brian McArthur - UBS

Harry Winston Diamond Corporation (HWD) F4Q10 Earnings Call April 1, 2010 8:30 AM ET

Operator

Welcome to the Harry Winston Diamond Corporation fiscal-year 2010 fourth quarter and year-end conference call. (Operator Instructions) Please note we will be making some forward-looking comments today. Various factors and assumptions were applied in deriving those comments and actual results could differ materially. The principle factors and assumptions that were applied and risks that could cause our results to differ materially from our current expectations are detailed in OSC and our SEC filings. I would 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. Good morning ladies and gentlemen and welcome to the Harry Winston year-end fourth quarter conference call. We began our last financial year with a quarter that looked into an economic chasm that seems might be bottomless. We ended the year now with a quarter that points the way to a strong recovery but in a diamond business significantly changed from the years before the downturn.

We entered the decline under the crush of securitization failures in America but we leave that decline on the back of strong economic performance in the Far East and India. Our own business environment reflects this in that in 2010 35% of our sales were to customers outside of Japan whereas for this last year that same group accounts for 18% of our sales while sales in both the U.S. and Europe have declined.

I am now going to turn the call over to our Chief Financial Officer, Alan Mayne to discuss the financial results. Alan will be followed by Frederic de Narp, our newly appointed President of the Jewelry and Watch Division. Frederic is still formulating his plans for the profitable growth of the brand but even at this early stage he will share his vision and enthusiasm for the opportunity this business represents. I will come back at the end to discuss the mining business and rough diamond sales before we close.

Alan?

Alan Mayne

Thank you Bob and good morning. The company’s consolidated results for the fourth quarter reflected the positive impact of the improving global economy from the sectors in which we operate.

Consolidated sales increased 13% from the same quarter last year and excluding severance costs earnings from operations were positive for the first time this year. Our foreign currency exposure has a material influence on our reported earnings. During the fourth quarter ended January 31, 2010 the Canadian dollar strengthened slightly against the U.S. dollar. This resulted in a net $2 million foreign exchange loss in the quarter compared to a net $4.6 million foreign exchange gain in the same period last year. Taking into account this foreign exchange loss our interest expenses, other income and expenses and income tax recovery we reported a small net loss of $3.4 million or $0.04 per share compared to net earnings of $73 million or $1.19 per share in the fourth quarter last year.

Now I am going to spend a few minutes on the financial review of our mining and retail segments. As highlighted in our results released yesterday rough diamond sales for the quarter increased $63.5 million from $51.1 million in the same period last year resulting from the combination of the 12% increase in rough diamond prices and an 11% increase in karats sold. Rough diamond production during the quarter was significantly lower than the comparable period last year due to the planned reduction in mining activity to reflect the softness in the rough diamond market earlier in the year.

Rough diamond prices continued to increase over the third quarter of this year but remain slightly lower than the high achieved during fiscal 2009. Retail segment sales increased 4% in the quarter compared with the same period in the prior year resulting from continuing strength in Asia and better performance in the U.S. The gross margin in the quarter was unusually low reflecting a product mix that comprised a higher portion of lower margin sales.

Selling, general and administrative expenses were 51% of sales, consistent with the prior year. The cost control measures the company introduced at the beginning of the fiscal year remain in place. Excluding severance costs the retail segment would have recorded a loss from operations in the quarter of $2 million, the same as the fourth quarter last year.

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

Frederic de Narp

Thank you Alan. Our fiscal year has ended on a positive note. Economic conditions have improved with many retailers reporting a stronger holiday season compared with a year ago. Overall consumer sentiment appears to be more positive. Consumer demand for luxury products are decreased as a result of the positive wealth effect of the rise in equity market and continued strength in Asia.

During the fourth quarter ended January 31, 2010 the positive sales trends have continued and sales for the quarter are [over] prior year by 4%. This represents the first quarter during the fiscal year where sales were higher than the comparable prior year. Sales in all regions except Europe generated higher sales in the fourth quarter compared to the prior year quarter. The global economy continues to recover from the recession at different rates depending upon the region. The United States and European markets have stabilized although significant economic challenges remain.

Our introduction during the holiday season of the New York Collection by Harry Winston, a series of jewelry and time pieces inspired by the memory and architecture of some of New York’s most famous landmarks, has received a positive response from the press and consumers. We continue to experience strong consumer demand for our products. There is a sense of optimism that the worst of the recession is over. Harry Winston expects sales in the luxury jewelry market to continue to strengthen.

The positive momentum from the holiday season has continued into the first quarter of the New Year. Emerging markets including Asia are likely to remain strong as the United States and European markets remain on the road to economic recovery. I was delighted to join Harry Winston three months ago and during that time I embarked on a tour to meet all of our selling Directors and many of our top end clients. It has been fascinating to experience the strength of the belief in the brand from inside and outside.

Harry Winston today is the most exclusive timeless jewelry [inaudible] luxury brand for watches and jewelry. There is still a lot of space for development by bringing the brand to more people with new products and geographic development. Harry Winston is a brand that does not compromise. It uses the finest stones, finest materials and craftsmanship. It is particularly well positioned to touch clients who have evolved enough today in a quest of authenticity and uniqueness.

I believe the strength of our brand supported by the introduction of new products and strength in our distribution network leaves our company well positioned to grow sales and profitability during the next several years. So now let me turn it back over to Bob.

Robert Gannicott

Thanks Frederic. Following the collapse of Lehman Brothers in September of 2008 the diamond market began a steep decline that was not halted until March 2009 at which point rough diamonds were trading at about half of their pre-recessionary highs. The producer’s response to this including ourselves was to reduce costs as much as possible by cutting production of diamonds that the market could not in any case absorb.

Prices have now rebounded to almost the previous highs as demand has continued to expand in emerging economies led by China and India. The industry generally was producing at extreme capacity and is not capable of returning to those levels at least in the near-term. This implies price increases as recovery in the U.S. and probably later in Europe becomes the reality coupled with the ongoing growth in China and India. The Diavik mine closed for a 6-week period in the summer of last year and operated through most of the rest of the year at deliberately lower capacity.

We only delivered 5.6 million carats last year compared with 9.2 the previous year and a plan for 7.8 million carats this year. The objective going forward is to fully utilize the 2 million ton processing plant capacity while expecting the transition to underground mining. Although there is a plan in place to achieve this of course it must remain flexible to be able to deliver cost and productivity improvements in the light of actual experience.

As well as the 60 million carats of proven and probable reserves there is also a further 22 million carats of resources as well as additional volumes of mineralization that are extensions of the known kimberlite ore mines. Studies are underway to use alternative mining methods to economically bring this material into the reserve base and thereby extend the mine life. The A21 kimberlite pipe is an example of this approach.

We look forward to the coming year when the mine is well prepared for open pit production that will take it into the next decade. We have a well honed sorting and sales platform that is uniquely informed of market changes through polished diamond purchases as well as rough market intelligence. We now have a newly energized watch and jewelry division that is preparing to deliver on the economic promise implied by such a prestigious brand as Harry Winston.

Thanks for listening to us. We are now ready to listen to you as we take your questions. Thank you.

Question and Answer Session

Operator

(Operator Instructions) The first question comes from the line of Irene Nattel - RBC Capital Markets.

Irene Nattel - RBC Capital Markets

I was wondering if you could please give us some more color on what you are seeing in terms of end demand for both the polished jewelry out of retail but also in terms of the types of stones you are seeing a big demand on the rough side?

Robert Gannicott

I will start on the rough side and then we will let Frederic have a go at the jewelry side. On the rough side it is still evolving. The recovery when it first happened was in items that were smaller and very liquid. In other words the person buying them has the intention of polish them quickly and pass them into a market that was still liquid. Those really are the classic engagement ring stones. Nothing too big. Nothing too expensive. They were the ones that really got the thing rolling. The fill in behind that is as the watch business recovers a bit, smaller stones, the so-called melee of stars, have started to do much better.

The place that is still somewhat stuck funnily enough are the ones that are the large things that produce polished stones that are in the 4-8 carat range of polished diamonds. They are still at prices that are lower than they were at the peak. Otherwise pretty much everything else has gone back up and even some items have actually gone above where they were in the peak. I know that is a bit slightly more complex answer than you might have hoped for. Does that get it?

Irene Nattel - RBC Capital Markets

That is great thanks.

Frederic de Narp

For the jewelry side we have noticed a strong demand for unique pieces, rare pieces and special orders. We have currently in the pipe a quantity of special orders it seems we haven’t had for many years. That is for the unique piece side of it so unique clients for unique pieces and special orders.

The other side of the business that is strong today is the bridal division. You know Winston is known for being [inaudible] of diamonds. As a matter of fact bridal is a growing activity for us. It is a growing activity for us in Japan and in different markets.

Irene Nattel - RBC Capital Markets

Presumably those are the smaller pieces in Japan, not the more significant stones?

Frederic de Narp

We have the two extremes. Effectively we have two extremes with growing activity of unique pieces we retail for more than $500,000 or more than $1 million and so there is a big demand for these rare pieces and there is extreme demand as well for the most accessible jewelry we produce and the $10,000-$15,000 engagement rings as well.

Irene Nattel - RBC Capital Markets

If I could please get a little bit more color on how exactly the mix evolved in Q4 to get that 44% gross margin and how we should be thinking about the gross margin on a go-forward basis?

Alan Mayne

The way the mix evolved we had a greater proportion of wholesale watch contribution in the quarter relative to salon sales. The margins on wholesale watches are generally depending on the composition of the specialized pieces like the [Olga] are generally lower than what we see in the salon. That was one factor.

The other factor was at the high end the margins are typically lower than what we see across the network. In the quarter they were lower than what they were on average during the year and in prior years. Those are the main things. In the first two months of the year we are reverting towards, if there is such a thing for us now, the traditional mix. But we are reverting towards a traditional mix of sales with margins that would be customarily along where we were historically. So as Q3 was an anomaly at about 55%, Q4 was an anomaly. If you look at the year we actually protected the margin pretty well and we were up. We have reverted back to a more typical mix of sales and margin from what we can see from the first two months of the year.

Operator

The next question comes from the line of Des Kilalea – World Bank.

Des Kilalea – World Bank

Can you speak to the ice road? One of our colleagues in Toronto pointed out you had actually had a pretty mild winter and we are all worried you won’t be able to get the full 6-7 weeks out of the ice road. Then also on the A21 you did talk about looking at new mining methods or maybe address that a little bit. Finally, on costs for the final quarter and I know you are kind of taking a stab at it because you don’t have all the inputs to get the conclusion because we don’t know your price per carat, etc. but it looks like cost per carat went up quite high and you do mention some of the reasons such as lower production and so on but maybe you could put a bit more flesh on that?

Robert Gannicott

The easy one is the ice road. It finished on March 24th with the whole completed. There was sort of a slightly challenging period for about a week in the middle of it when the temperatures even in late February got unseasonably warm but it got adequately cold again and it was minus 30 in the middle of last week. The ice road is finished so that one is dealt with.

The second one was on mining methods. A21 in particular. In fact because in the early months of the first quarter the mine has actually done better than I would have expected with regard to budget. They have actually pulled some work that was planned to be done I think next year on A21 forward into this year. What it consists of is to actually place the rock berm and instead of using a cut off wall which is the expensive part of building one of these, quite frankly placing the berm is really just another way to put waste off from the open pit. But putting in the cut off walls is the expensive part. So on A21 instead of doing that a silk curtain is going to be laid against the interface of that rock berm. There will be no attempt to draw the water down of course. There won’t be any hydraulic barrier.

This really only forms a very secure silk barrier and then the idea is the A21 will be mined using a combination of suction dredging technique with a cutter head attached to the end of it. So this pipe will be excavated and suctioned from a new head floating on [inaudible] during the summer and on the ice in the winter. This is being test run to one of the [inaudible] pipes. It is believed to be a sound and viable technique. They are going to test that this next year. If of course they find it doesn’t actually work well enough then the rock berm is there and a cut off wall can be inserted and conventional mining following the withdrawal of water could be undertaken later. That is really what we are doing there now.

I should also add to that though that perhaps one of the interesting things from a cost point of view is that the underground mine design was quite appropriately made to be quite conservative. It tails the use of a lot of cut and fill mining where all of the openings that are produced have to be filled with a mixture of sand combined with cement and of course the sand has to be manufactured by crushing and grinding granite. Very expensive process. Now that we are underground parts of the ore have been de-watered and some test mining has been undertaken there is considerable optimism that much cheaper techniques could be used; everything ranging from instead of cut and fill mining maybe blast [filling] but also sub-level caving is thought to be a viable method.

So I think we are likely to see some change on the underground costs and the underground mining velocity going forward. That is still part of an evolving plan. Your third question is going to be taken by Alan.

Alan Mayne

In the quarter about 4 million of the increase in cost of sales was foreign exchange which differs from what you see in that $2 million on a consolidated basis. The foreign exchange during the quarter on the income statement is essentially measured at rates at which the transactions occur. So it is more of an average rate. So there was about $4 million. The balance of the increase related to ramping up for the underground. So the underground capital project was done in phases and so once a phase is complete, the costs associated with keeping the underground warm, de-watering, hiring new labor, those costs are expense and that plus the foreign exchange were the primary drivers of the increase. What I would say is we reiterated the cost of sales guidance that we had in Q3 and Q4 and I think last year at this time we guided to $185 million cost of sales and we have come in lower than that.

I think we feel very good about the guidance this year and aligned with what Bob said the mine is off to a good start. We would like to obviously have a positive variance going forward this year on the cost side as well.

Des Kilalea – World Bank

So in this last quarter there was no material inventory movement that would have contributed to costs? You didn’t sell down any stock?

Alan Mayne

Yes we did. If what you are asking is did we sell more carats than what was produced the answer is yes.

Robert Gannicott

We are very apologetic about the fact we can’t just plain and simply just give the price per carat. I will just remind everyone and I do it every conference call that the only reason we do it is we cannot get a legal opinion that says if we did so we wouldn’t be subject to antitrust attack.

Operator

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

David Christie - Scotia Capital

A couple of questions on costs. On the mining costs your guidance of $265 million next year which was quite an increase from this year. I was wondering if you could give a little more color on what the cost per tonnage may be and what the DD&A split out of that is?

Robert Gannicott

While Alan is working that out, underground mining although there is material at the moment that is actually going through the processing plant, it is ore being mined underground so it is underground mining. It is obviously very expensive ore because it is just a development mine that is being delivered from putting in the tunneling work if you want to call it that and the drifting that has to be put in, in order to blast [fill] and starts and fill [slopes] that are required. So it is all development and as you know that is very expensive. We actually started on a production type starting in the middle of the year. I think in July we have the first stokes actually going in [A1] platform north actually. That will be production mining. Of course the cost per ton for that is very much lower.

Alan Mayne

In terms of the split between cash and non-cash it would be about 175 cash and 90 non-cash. The change in cash, part of that is foreign exchange as well.

David Christie - Scotia Capital

How much of that is foreign exchange?

Alan Mayne

About $12 million. When you look at the balance of that what we have got here is as Bob mentioned costs associated with the early stages of undergrounding which I think we mentioned are going to be higher than they were with open pit. We also had the shut down this year which also resulted in some cost savings this year. The main components of costs being labor, fuel and consumables, those are the main drivers that are going up next year.

David Christie - Scotia Capital

As you move towards the middle of the year and you get moving on-stream there in underground on a normal basis costs should come in line with typical underground costs?

Robert Gannicott

Exactly.

David Christie - Scotia Capital

By 2011 it should be really moving steadily ahead at good costs?

Robert Gannicott

I think by 2011 we will actually see some of these new mining concepts adopted like particularly sub-level caving. It is sort of believed now we can do A418 with sub-level caving as opposed to requiring any back fill. That may well mean the open pit at A418 is actually stopped shorter than it otherwise would be. You get the sub-level caving is so cheap anyway and it is better than doing further waste [lay back] at 418. So these are all things that are in the hopper at the moment.

David Christie - Scotia Capital

What would you say is the cost difference on a per ton basis is?

Robert Gannicott

I was afraid you were going to ask that. I wouldn’t want to take a stab at it right now. I believe 30%. Just because of not needing the wall of cement on there, never mind the mining method.

David Christie - Scotia Capital

Going to the retail side you didn’t give cost guidance there of course but in the quarter we saw higher costs than I would have thought there would be. Are we going to see any savings moving forward there?

Alan Mayne

Are you talking SG&A costs?

David Christie - Scotia Capital

Cost of goods and SG&A. They both seemed higher than I would have thought they would be.

Alan Mayne

Well SG&A has severance in there of $2.7 million which if you back that out would have put it lower than the same quarter last year. So obviously the SG&A flexes with changes in sales and we are expecting a strong recovery in sales next year. So there will be some flex there on the SG&A. I think further savings the answer would be no. We have trimmed excluding the severance we would have been down to about $121 million from $136 million.

So that is basically a $15 million savings. Clearly it is in the best interest of the business to look at this cost profile and say we need to put something back where we cut. Not necessarily on heads but certainly on marketing and promotion. That is absolutely vital. Again we are very cognizant that we have to monitor that in conjunction with sales. What we can say in the first few months is we have been very pleased with where things have come out.

I think the gross margin is obviously affected by raw materials costs which are increasing but then we price on a cost plus basis. Again I wouldn’t expect to see savings in cost of sales necessarily although I will turn it over to Frederic to elaborate but if we expand the watch range and change some of the materials, still using the highest quality but different materials, there might be a change in the overall margin given the mix.

Frederic de Narp

Two things. More than savings we see increasing the profitability of our stores. We have 19 salons around the world and the first priority is truly to make them all profitable on one side. On the other side we have a network of approximately 180 worldwide which is good because it positions us as the most exclusive watch maker in the world. There are many countries we can open and we have to open with some doors. There is ways to develop watch activity to have sustained balance between jewelry and watches and retail and wholesale. That should bring more profitability as well.

David Christie - Scotia Capital

Did the cost of goods when you are doing more unique pieces they tend to rise? Is that the case?

Frederic de Narp

As I said before we see the increase of unique pieces. Unique pieces are stone related and with lower margin. That is growing activity but also the other extreme is increasing with the more accessible pieces of jewelry. I told you about the bridal activity which is growing at profitability. As I said before about the introduction of the New York collection which is a very modern, profitable collection for us which is growing as well. So we will roll out this collection. It has been a little bit slow in the U.S., mostly in Japan and we are going to roll out the development and installment of this collection in all the markets of the world. That should be extremely positive as well.

David Christie - Scotia Capital

So for fiscal 2011 the ratio of cost of goods to revenue and SG&A to revenue should be similar to what it has been this year?

Alan Mayne

No. It ought to come off just based on the operating leverage in the business. It is a very high operating leverage in the business. If you include depreciation you are looking at maybe 10-12% variable costs. So there is operating leverage in the business. We would expect the ratio to come down and hence convert the increased sales into operating profit. The cost for piece is importantly obviously but we price on a cost plus basis. The gross margin that we have seen this year is more affected by the mix. So that is what will drive the gross margin. It is important to remember we have a lot of operating leverage. Unfortunately in some years and fortunately in the ones to come.

David Christie - Scotia Capital

What do you expect the effective tax rate to be?

Alan Mayne

39%. Going down to 37% by 2013. That is assuming no major moves in foreign exchange and other matters.

Operator

The next question comes from the line of Irene Nattel - RBC Capital Markets.

Irene Nattel - RBC Capital Markets

As we know your reported segments for retail reflect where the actual sales were booked as opposed to where the real customer demand is coming from. Can you talk a little bit more and give color around…we understand the U.S. is still sluggish but what is happening in Europe? Sort of different pockets and also Asia and the Middle East?

Frederic de Narp

Well we saw weakness of demand last year from the Middle East and Russian clients who are very important for us. We see a slight return of these clients. The most important demand is coming from Asia. The Chinese are extremely important. From China we have extremely important special orders. So we see significant [contribution] from China. Also related to the fact we have very small distribution in Asia and we will grow distribution in Asia. We currently have one single store in China in Beijing. So we will expand distribution there in retail and in wholesale so we see future growth coming from Asia.

The U.S. market is growing too so we see a little recovery there and European sales as well.

Irene Nattel - RBC Capital Markets

Recognizing it hasn’t been all that long since you have been there when can we expect to hear more around your thoughts for really how to make the retail business a viable concern from an economic perspective?

Frederic de Narp

June is my commitment to present the five-year vision of the brand. I can always tell you the two first months of the first quarter are very good for Harry Winston. The entire vision will be exposed during the month of June.

Operator

The next question comes from the line of Brian McArthur – UBS.

Brian McArthur - UBS

I just want to make sure this is true but just to clear everything you talked about diamond prices going up, maybe not as much in certain values versus others but given your mix of production next year where it was coming from, given you had inventory from last year going through I assume that the weighted average carat price even though you can’t give it to me will be up year-over-year when we are all said and done here. Is that still a fair comment?

Robert Gannicott

Absolutely. I can give you a bit more perspective on that. The average price is pretty much back where it was at the peak now. Within a couple of percent. Of course one of the myths around in our view is this business about the gap between rough to polished. Polished prices did not go down anything like rough prices for obvious reasons. The people who have to polish held onto it through the decline whereas if you really needed to sell rough diamonds as we did during that crisis we were really paying somebody a fee to stockpile them for you. So there is much more price movement on the rough than on the polished. Polished diamond prices have essentially recovered as well but they didn’t recover from anything like the [inaudible].

Brian McArthur - UBS

But just given your mix over time has gone more 418 to 154 which theoretically and historically 154 subject to phases had a higher delta to begin with, how it all gets weighted through I just want to make sure it all works out.

Robert Gannicott

There will be a mix of 154 and A418. That is actually only a part of A418 but as the finer size distribution. The other part of the pipe is pretty much the same.

Brian McArthur - UBS

Are we in the good part or the bad part of 418 next year I guess is where I am going with this?

Robert Gannicott

Some of both. A154 is still in the mix as well. We are not anticipating any kind of sudden collapse in diamond price because of that.

Alan Mayne

We are also going to get some A154 North as well. A small amount. This year we were probably about 62% 154 south. The balance was 418. Next year it will be 50/50. Close to it but there will be some North in there. So I think to be definitive we would expect given current market conditions on the rough side to have on an absolute dollar basis a higher average price per carat next year than we had this year.

Brian McArthur - UBS

The only reason I am going through this is back to Dave’s question about costs. We are still running a couple of hundred bucks per ton in costs until we go down that 30% to whatever 140, the margins aren’t expanding that fast if we don’t have the prices right?

Robert Gannicott

Right.

Brian McArthur - UBS

On the costs you used a dollar parody for the Canadian/U.S. dollar and that is what it is. Has that all been…you obviously ship a lot of stuff and you buy oil, labor is heading north. Is a lot of that fixed in the dollar now or is there a lot of currency sensitivity going forward if the Canadian dollar were to move a lot one way or the other?

Alan Mayne

There is sensitivity simply because of the translation.

Brian McArthur - UBS

Right but that is the accounting part for the deferred and all that. What about on a cash basis?

Alan Mayne

No. When you see our operating expenses, the way we develop the budget effectively we take the plant in Diavik for operating costs. Take our 40% at $1. So for example we would expect to see if the Canadian dollar amount in Q1 is on plan our income statement, cash operating expenses would be lower because the dollar has averaged less than par in the first quarter of this year.

So that has a real impact on reported results. To your other part of the question for those costs that are denominated in dollars but are budgeted in Canadian to the extent we have contracted at fixed rates, those are fixed. I think I am going to leave it at that. There are two parts to it. But the movement of the dollar during the course of the year will have an impact on reported results that you see.

Brian McArthur - UBS

So there is not a large portion of the costs that are contracted at that dollar indirectly or directly?

Alan Mayne

No. But again as I say if you took 40% of the Diavik plant at $1…you understand that math.

Operator

The next question comes from the line of Des Kilalea – World Bank.

Des Kilalea – World Bank

A follow-up from a comment made about watches. Could you say is part of your new plan there is going to be more expansion or less expansions on salons? A question for Bob on the mine. With going underground obviously processing you want to try and get the plant back up to full 100% usage again. The A21 is part of that. Are there any other ore bodies nearby perhaps even jointly owned that could be brought into the mine plan or the resource plan?

Frederic de Narp

Watches represent a huge area of development for us. Consider that today some of the most exclusive watch brands, or at least perceived as such in the world, they produce in the vein of 70,000 watches a year or 80,000 a year. This is perceived as exceptionally unique watchmakers. While for us we just sell 2,000 watches a year with an amazing position in the mind of the watch collectors in the world. So you understand by still keeping Harry Winston as the most exclusive watch maker in the world we are groomed for large development in watch activity. It [meets of course] and would indicate an opening of distribution as well and mapping the world. So there are many cities where we are not.

For the retail salons we currently have 19 salons. I said first priority is to make them all profitable. Most of them are profitable but not all of them. The other priority is to open in some cities where we are not. It is not correct not to have any store in Moscow so we will open a partnership store in Moscow. Dubai should be a designation we should open. China is obviously. So we don’t want to go for quantity but for quality and quality openings of new salons.

Robert Gannicott

The mining question, for a start there are these extensions of depth of course. These are portions of all three pipes that have been identified by drilling and seismic profiling. So the pipes are known to extend. There isn’t enough drill information to give grade and carat value information to the level they could be put into reserves or even resources at the moment. They are known to be there and from a geological sense it would be a surprise if they were any different than the rest of the pipe.

However, mining those really gives you an extension of mine life rather than mine velocity. Because obviously you have to wait until the development is at that level before they can be accessed. What does add velocity potentially is there straddles the boundary between BHP and ourselves, both the [inaudible] pipe and I think we called it 841. It is about half and half. There is a conversation that has started now about the pipe is only 130 meters from the edge of our underground development so it is quite easy to put a heading there and collect a large sample and take a look at whether we can mine the portion that is accessible from underground which would obviously mean leaving a [cutter] under the lake and then if the mining method for A21 is successful then one could contemplate putting some of a low berm around this thing because it is very close to the 154 site.

So another extension lobe on and mining that in the same way as for A21. Those are all things that are in the hopper but there is certainly more work and more information required.

Des Kilalea – World Bank

A follow-up question on retail. I am sorry; I don’t understand retail business very well. The inventory on the balance sheet in the retail division did come down but is part of your strategy and maybe you can’t say this yet to try and accelerate the rate of turn of inventory in the retail business? Would that be part of it or is it a focus on margin rather?

Frederic de Narp

Yes, we will have ways to generate [inaudible] at least. Winston is about unique pieces, unique stones and unique materials. We are really organizing platforms so that we really bring the uniqueness of the brand to the high net worth of the world. So we have already programmed and organized and will organize somewhat even we are really planned [inaudible] possibility to enjoy the uniqueness of the stones but all at once so they have a look and see what Harry Winston is all about. That has proven to be extremely successful. We have done it already. We will do some more like that. That will accelerate the turn of the unique pieces by putting them together at the same location. The rest is really about increasing the supply chain, the processes in the supply chain to guarantee there is more in stock and [inaudible] engagement rings are finished automatically so we are also working on that.

Operator

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

David Christie - Scotia Capital

On the $175 million you said was the cash portion of costs at the mine you said there was $12 million in FX costs. Where does that come from because you are using a 1x relationship?

Alan Mayne

That is year-over-year so when we look at the average rate implied in the cost of sales the cash cost of sales for this year compared to planning at par it is about 12-14. If you were to take the average rate this year and look at the rate differential against the new plan you get to about $12-14 million.

David Christie - Scotia Capital

So decreasing costs because of the higher…

Alan Mayne

Exactly.

David Christie - Scotia Capital

A question on sites. You had eight sites last year. What is your expectation for this year?

Robert Gannicott

The usual 10.

David Christie - Scotia Capital

This quarter we are in right now? How many are you going to have?

Robert Gannicott

I think it goes over into May so it will be [2] as well.

David Christie - Scotia Capital

You are still sitting the [week] before DeBeer sites?

Robert Gannicott

Nominally. We spread the sales around a little bit more than that because we do make direct sales into India for instance.

Operator

At this time there are no further questions.

Robert Gannicott

Thank you very much for being on the call. See you again next quarter.

Operator

Thank you for your participation in today’s conference. This concludes your presentation. You may now disconnect. Have a great day.

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Source: Harry Winston Diamond Corporation F4Q10 (Qtr End 01/31/2010) Earnings Call Transcript
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