Harry Winston Diamond's CEO Discusses Q3 2012 Results - Earnings Call Transcript

Dec. 9.11 | About: Dominion Diamond (DDC)

Harry Winston Diamond (HWD) Q3 2012 Earnings Call December 9, 2011 8:30 AM ET

Executives

Laura Kiernan - Director of Investor Relations

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

Robert Gannicott - Chairman and Chief Executive Officer

Cyrille Baudet - Group Chief Financial Officer

Analysts

Tanya Jakusconek - Scotia Capital Inc., Research Division

Irene Nattel - RBC Capital Markets, LLC, Research Division

Jafar Alam - Berenberg Bank, Research Division

Daniela Nedialkova - Atlantic Equities LLP

Edward Sterck - BMO Capital Markets Canada

Matthew Hill

Richard Hatch - RBC Capital Markets, LLC, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Harry Winston Diamond Corporation's Fiscal Year 2012 Third Quarter Conference Call. My name is Clarissa, and I will be your conference coordinator for today. [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 CEO, Mr. Robert Gannicott. Please proceed.

Robert Gannicott

Thank you. Well, good morning, everyone, and welcome to the Harry Winston Diamond Corporation Third Quarter Results Call. Joining us from New York is Frédéric de Narp, the CEO of Harry Winston Inc., our Brand Jewelry and Timepiece division; and with me here in Toronto is Cyrille Baudet, our Group Chief Financial Officer.

So following this introduction, Cyrille will discuss our financial results, followed by Frédéric's perspective on the brand business. I'm then going to come back to discuss the mining business and the rough diamond sales.

On a global basis then, the third quarter might best be described as turbulent and lacking a clear trajectory, at least as far as the rough diamond and jewelry markets are concerned. Although the European consumers are not one of the largest markets for diamond jewelry, the euro crisis has affected the confidence of the lending banks to the industry, thus removing liquidity from the supply chain. As the industry sold diamond stocks to raise liquidity levels, the demand for rough diamonds faltered and pricing became uncertain.

We elected not to sell our full production, but only diamond assortments, where demand remained robust such as items that yield polished diamonds for the watch industry, for example. The rough diamond market is now more settled, allowing us to resume much broader sales at prices that, although down around 25% from the speculatively high prices of July, are still around 25% above the prices of a year ago.

Unlike the dramatic collapse in 2008 and 2009, the global consumer is, collectively at least, still performing well, with Chinese tourists increasingly prominent in the shopping cities of the world. Our own business has been especially successful in growing the bridal and timepiece segments, with new marketing campaigns and designs that have broad appeal. This has changed the composition of sales from dependence on the unpredictable ultrahigh ticket sales to more repeatable transaction.

This transition, of course, required some one-off costs to create platforms that can then be expanded to support future growth. I'm now going to hand the call over to Cyrille to discuss the actual results, followed by Frédéric to discuss the brand business in more detail, and I'll then return. Over to you, Cyrille.

Cyrille Baudet

Thank you, Bob, and good morning, everyone. Our company's consolidated sales for the third quarter were $119.7 million, which were down 15% versus last year. This was driven by a 40% decrease in our mining segment sales, partially offset by a moderate 4% increase in our luxury brand segment sale. Frédéric will speak to the luxury brand numbers later on, and I'll cover off on our mining results.

Sales for our mining segment were $36.2 million in the third quarter versus prior year sales of $60.7 million. While the average rough diamond prices increased 68% versus last year comparable quarter, $159 per carat versus $95 per carat a year ago, the achieved rough diamond price per carat was cued by the company's decision to hold back some lower-priced good due in part to a current oversupply in the market.

In terms of volume, we sold 230,000 carat this third quarter versus 640,000 carats last year, which represents a 64% reduction in the volume of carats sold. Our share of Diavik collection [ph] for the third quarter was 773,000 carats, up 8% versus the prior year, primarily due to increase in ore processed. The reduced sales and the related inventory build in the quarter were mostly the result of our selling strategy. We choose not to sell our rough diamond inventory at significantly discounted price, and the demand for rough diamonds slowed between August and the end of the traditional Indian holidays of Diwali in October. The wider range of rough diamonds sales probably began during the fourth quarter and at an improved price.

Our consolidated operating result for the quarter was a loss of $1.9 million versus an operating profit of $14.8 million in the prior year third quarter. This quarter included a noncash derecognition charge of $13 million for the mining segment relating to certain component of the backfield plant that will longer be required for the sublevel retreat underground mining method. Most of you are aware of this change in underground mining method will enable us to significantly reduce our operating costs at the mine from what we previously planned. Excluding this charge, the consolidated operating profit would have been $11.1 million, and the mining segment operating profit would have been $9.7 million, which would have been slightly ahead of a year ago of $9.4 million. Our consolidated gross margin was 36.9% in this quarter versus 39.8% in the prior year quarter.

The mining gross margin was 5.9% in the quarter and would have been 41.8% excluding this one-off derecognition charge versus a 25.8% gross margin last year. Consolidated EBITDA was $21.2 million in the quarter versus $33.5 million in the prior year. Our mining segment EBITDA was $16.7 million or 46% of sales versus $24.9 million or 41% of sales last year. The company loss per share for the quarter was $0.06 or a positive earnings per share of $0.04 when excluding the derecognition charge. This result is compared to earning per share of $0.15 last year for the same quarter.

Our liquidity is solid with cash of $83 million and availability under our credit facilities of $106.2 million. Also during the third quarter, we repaid the Kinross promissory note of $70 million plus accrued interest.

In terms of our outlook, we anticipate production of Diavik will be 6.9 million carats for the current calendar year with actual production estimated at approximately 8.3 million carat. We expect that some of the carat produced in 2011 can be sold next year along with the 2012 production.

I will now hand over to Frédéric de Narp, the Chief Executive of Harry Winston Inc., who will discuss the result our jewelry and timepieces business. Okay, Frédéric.

Frederic de Narp

Thank you very much, Cyrille. I would like to briefly talk about our results in the quarter and update you on the execution toward our 5-year vision.

During the third quarter, our sales were $83.5 million compared to $80.2 million in the same quarter of the prior year, up 4% or down 4% on a constant exchange rate basis. On a regional basis and at constant exchange rates, our sales during the third quarter were up strongly in the U.S. and Japan and were lower in Asia outside of Japan and Europe. We also have an underdeveloped footprint versus our competition both in Asia outside of Japan and Europe, which we believe contributed to the softer results.

Year-to-date, our sales were $298.1 million, up 41% versus the prior year or up 29% on a constant exchange rate basis. Our regional results on a constant exchange rate basis year-to-date are strong in all regions, with the exception of Europe, which had experienced lower high jewelry sales.

In the quarter, our gross margin is flat with the year ago at 50.4%, and our operating income -- our operating profit is down versus the prior year at 1.6% versus 6.7%. The increased margin that came from our positive change in product mix was offset by the negative impact of a strong Swiss franc and higher raw material cost, including diamonds and precious metals, platinum and gold. While we implemented price increases this year, we did not pass 100% of the increase in raw materials cost onto the consumers.

Our SG&A expenses increased by $5.7 million in the quarter to $40.8 million, which represents 48.8% of sales versus the prior year of 43.7% of sales. These additional expenses are related to the support of the brand vision and the expansion of our retail network. We generated EBITDA of $4.5 million and an operating profit of $1.3 million in the third quarter compared to EBITDA of $8.6 million and operating profit of $5.4 million last year.

In addition to the higher raw material cost and negative currency impacts that I've just mentioned, we had seasonal increased marketing expenditures leading into the holiday season and expenses related to the anticipated openings of new salons in China during early 2012.

We continued to make significant investment in SG&A to drive our growth strategy, especially in geographies where we are adding new salons and in our timepiece manufacturing facility in Geneva where we are adding machinery and investing in the development of our own movements.

The work and the investment by the Harry Winston team continues to bear fruit, translating into growth in the predictable segment of our business such as bridal, jewelry collections and timepieces. We are continuing to implement the 5-year vision, which consist of maintaining our unique position as one of the most exclusive brands in the world while expanding the bridal jewelry collection and timepieces segment to reach new audiences.

The synchronized 360-degree action plan we have developed to grow our bridal segment has resulted in sustained growth of the business globally. This year, we developed new advertising, visual merchandising, we began in-store training programs for sales executive, developed a CRM strong program and have had a very successful public relation campaign.

After successful launch of the Lily Cluster collection in the second and third quarter, we are now launching the Ultimate Adornment high jewelry collection, ranging in price from $40,000 to $5.8 million, and this is the most important designed high jewelry collection launched by Harry Winston in the last 80 years.

In order to achieve accelerated growth within our timepieces segment, we raised Harry Winston's visibility by increasing our communication investments. Just between September and November, we secured a premium presence for Harry Winston at global watch events worldwide, including the salon Belmont in Shanghai, Belmont in Paris, Munich Time in Germany, CR Watch Fair in Mexico, QP Salon in London, the Bahrain Watch Fair in the Middle East.

After the successful launch of the Midnight Collection in the second and third quarter, we are now launching the Ocean Sport line during the fourth quarter. Our new boutique concept in Las Vegas was created by studio associate and will be rolled out in the rest of the salons. This new design concept includes a modified facade, which is less intimidating and contains separate areas dedicated exclusively to bridal collections, jewelry collections, high jewelry and timepieces, respectively. This allows us to attend to the particular needs of our diverse clients or to the needs of both our most exclusive clients and more accessible clients.

Our retail expansion is in full swing. We have salons opening in the most prestigious and exclusive areas of the world. In fact, during the third quarter, we opened a licensed salon in the Middle East in the Dubai Emirates Towers and a second salon will open in the Dubai Mall in December. We are also preparing to open a licensed salon in Moscow in March 2012.

Harry Winston has limited exposure in mainland China, but will open 3 salons the next fiscal year. Harry Winston's unique diamond jewelry and heritage brand built upon quality, craftsmanship, design has untapped potential in China as consumers become more selective.

In terms of our outlook that we experienced an accelerated growth in the final quarters of last year, with sales in Q3 up 48% and in Q4, up 89%, from the Q3 and the Q4 in fiscal year last year. This growth was mainly due to the sale of a small number of high-end jewelry items related to the Court of Jewels event, which means that we have very challenging comparisons versus the prior year for the third quarter this year and the fourth quarter.

While the short-term economic conditions remain uncertain, the pace of wealth creation in emerging countries continues to trend strongly upward. The increase of travelers who represent 30% of luxury consumers and the increasing appetite for authentic luxury will benefit Harry Winston over the mid- to long-term. Additionally, the bridal trends in China are following a similar pattern to those in the U.S. and Japan, with many first-time brides receiving diamond engagement rings.

We remain optimistic about the holiday season and expect a solid fourth quarter this year. There is a possibility that we do not repeat several of the significant high jewelry sales of last year's fourth quarter, but we have important jewelry events we are working on and, over time, we expect the high jewelry business will perform well with the inevitable peaks and valleys. We continue to believe that we will achieve results consistent with our 5-year vision. I will now hand the call back to Bob.

Robert Gannicott

Thanks, Frédéric. Thanks, Cyrille.

So turning then to the Diavik mine and our rough diamond business. This year has seen the beginning of the transition to underground mining, as well as a year of recovery from the effects of development projects halted during the 2008, 2009 economic crisis. A lower cost and higher velocity underground mining method is being adopted for both the A-154 South and the A-418 kimberlites, while a cheaper fill methodology is to be employed in the A-154 North pipe.

These changes mean that the paste backfill plant will not be required, at least in its original role, and is therefore being written down in our accounts. Although this has an effect on the financial numbers for this quarter, the benefits of not having the operating expense of this type of backfill method are substantial. The first production from the new mining method has already been achieved at A-154 South, and the new fill process has started in A-154 North.

A revised mine plan, both near-term and life-of-mine, is now undergoing the Rio Tinto approval process, but we anticipate that prior to our fiscal year end, we will be able to release details of this and a new ore reserve and resource statement will follow shortly thereafter.

The deep drilling program over the last year has identified additional resources at depth in the existing kimberlite pipes, as well as allowing earlier resources to be promoted to reserve category. The A-21 kimberlite pipe, which is important to maintaining processing velocity after 2013 when the other 3 pipes will be entirely mined from underground, is also undergoing a vast prefeasibility review to enable a decision to commence production in 2013 for first production in 2016.

This development and the other changes to the underground mine position Diavik to remain a strong producer of good quality rough diamond product well into the next decade, while our brand business builds both sales and operating margins. So thanks for listening to us, and we're ready now to listen to you and answer your questions. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Irene Nattel of RBC Capital Markets.

Irene Nattel - RBC Capital Markets, LLC, Research Division

I was wondering, Frédéric, if you could talk a little bit about what you're seeing right now in terms of demand from the customers in the various geographies around the world, recognizing, of course, the high mobility of your customers. And also, if you could provide a little bit more color around the evolution within bridal and timepieces and Lily Cluster's in terms of units sold and whether you think that you can achieve your targets for the year.

Frederic de Narp

Yes. Thank you, Irene. So first, what we acknowledge first is where the brand is well-installed and well-established, that is to say, North America and Japan, we performed very well and we continue to perform very well. Where, instead, we feel we are under visible, with no visibility or not the visibility we would like and -- especially in Europe and in Asia except Japan, then this is where we suffer. This is where we suffer, where you will see like the second quarter this year, fantastic second quarter plus 89% because you processed a fantastic high jewelry sales of big transaction and a quarter, yes, a quarter, no. So it's less stable and less predictable. The good thing is that it is, in this continent, Europe and Asia except Japan, that we are focusing all of our efforts, and you will see the development and the opening of new doors and new salons coming in the next few months in an accelerated manner. So that's the positive thing. In term of predictable business, while predictable, the business, the segments we are building, it's very exciting to see the bridal development. Bridal is speedy for us. Winston has this reputation for high-end quality stones, and there is an appreciation for authentic jewelry and beautiful stones in all the continents. So the bridal segment for Harry Winston grows double-digit in every single continent, which is a very good thing because this is the [French], the essence of who we are. The watch business, it's starting pretty well. As I said before, we launched the Midnight Collection. Not only have we reduced sellout but already reorder from the retail point of sales, which is extremely positive that before the holiday season just reordering. So we already can see in the Midnight Collection a pillar to the watch activity, to the timepiece activity, which is fantastic to realize just after 6 months launching the collection. So that's very, very encouraging. The rest of the jewelry collection, Lily Cluster was launched in May, June last year, and it continues on a positive trend. And it is -- it does do what we wanted; that is to say, capture a new audience. This new audience of a new woman, 25, 45 years old who buys something for herself. The Lily Cluster is the exactly the kind of thing she likes, and it is a new audience for us, so we are pretty positive.

Irene Nattel - RBC Capital Markets, LLC, Research Division

That's great. And I guess the corollary question is, and this is always the challenge, and particularly when you're in the kind of global environment we're in today, but it really is a truism that you have to spend money to make money. On the other hand, you have to be careful how much money you're spending to open new salons and investing in marketing because of the wobbly demand. So how do you guys internally try and manage the objective and the challenge of the spend? And sort of what kind of checks and balances might you have in place?

Frederic de Narp

The most -- can I just -- the most important thing, Irene, is to balance. It's all a question of balance, and we are balancing the development of our networks between the licensed salons, what we call the partner salons internally, the licensed salons and internally operated salons. For example, we had talked about 1 new partner salon in Dubai. Well, we have 2 know because the partner is so excited by the launching of the first one, wanted to open a second one, and we are -- here we are at the end of this month opening a second partner salon in Dubai. This is a great way to create awareness, presence of the brand, visibility, image, but balancing because most of the capital investment and investment is done by the partner, of course, who believes in the brand. Same for Russia, we are embarking into doing 1 salon and probably 2 salons next year with our partner in Russia. So you have ways to do that, and as well, open your directly operated salons that you want to control like it is a case for us in Beijing and Shanghai and own entirely the relationship. So we balance to the kind of half-and-half, open new salons with partners and balance our own, and it's a good way for us to manage the cash as well. Cyrille, maybe you want to add some more color?

Cyrille Baudet

Yes. In addition, you can see that there is a spike in our SG&A versus sales in the third quarter because we reached 48% of selling SG&A but this is due to the seasonality of our expense. On a 12 months basis, we are in line with our 40% ratio of SG&A on sales, which is comparable to what is spent in the industry. And we don't look at it at all SG&A the same way. We pay particular attention to fixed long-term SG&A as opposed to controllable SG&A, and we are very careful when building our budgets to differentiate between these 2 things.

Irene Nattel - RBC Capital Markets, LLC, Research Division

Actually, that's very helpful, Cyrille. So we should still be thinking about 40% overall for an annual number?

Cyrille Baudet

Yes, yes. I mean, there is a seasonality in SG&A that is not the seasonality of sales, and you don't spend on advertising, at the same time, you do your best sales, so you're always spending in a sense, which is quite typical of the third quarter.

Irene Nattel - RBC Capital Markets, LLC, Research Division

Okay, that's absolutely great. And one final question on luxury, and then I have a question for debt. But in -- I noticed that you're going to be opening another salon in London. Can you talk about where it's going to be, why you feel like -- that you need a second salon in London and how has the evolution been of the one salon that you do have open in London?

Frederic de Narp

London is really ahead for high-end luxury. It's -- maybe it's one of if not the capital of high jewelry in the world for the very high-end. We opened our salons on Bond Street, and we know that at Harrods, there is a complementary position there. It's not far from Bond Street, but different types of clientele shop in Bond Street and shop in Harrods. Harrods is reconsolidating their watch area and high-end jewelry area. They want Winston and we want to be there, and this is where we will be in the center of these high jewelry places. It's a -- this is part of a new development for distribution where we want to capitalize on the tourist. 30% of the spending in luxury goods around the world is done by travelers, and it is important we secure positions where the tourists go. Harrods is this one place.

Operator

Your next question comes from the line of Edward Sterck of BMO.

Edward Sterck - BMO Capital Markets Canada

So I've got a couple of questions. The first is, if you look at the Q3 results for the retail division and then back out the advertising costs ahead of the Christmas and holiday sales season and also the costs -- the expenses associated with opening the new salons in China, what would the adjusted Q3 operating profit have come to?

Robert Gannicott

We probably need to do a bit of math on that.

Cyrille Baudet

Yes, we don't really disclose that, but we could get back to you on that.

Edward Sterck - BMO Capital Markets Canada

No, that's great if that's possible. So I've got a couple of follow-up questions. First is, just in terms of the timing of -- or when new salons come on -- are opened, how soon after they open can one expect to see reasonable revenue flow from them?

Cyrille Baudet

From the new stores?

Edward Sterck - BMO Capital Markets Canada

Yes.

Cyrille Baudet

Yes, the -- we define the maturity of a store between 2 and 3 years. It depends on the market, but it's the time it takes for the management team to establish its ground and to build a clientele. So we have, of course, revenue from day 1, but the expected sort of normal level of revenue within year 2 or 3.

Edward Sterck - BMO Capital Markets Canada

Okay, great. And then just turning to Diavik. Does the cost guidance for fiscal 2013 include the impact of the sub level retreat mining?

Robert Gannicott

Not really. We don't -- we're still waiting for the new mine plan. Obviously, we've got a pretty good view of what it is now, but nonetheless, I mean, I think to finalize that, we have to wait for the new mine plan. And I would also say that like any new mine plan, I mean a lot of this is going to be based on actual experience. It in other words, yes, there will be a projection of what the costs are going to be, and it's going to be as good as anybody can do at the moment. But it will certainly be subject to review as we go along. So far, things are looking better than they have been projected. That's the only thing I'd say. I mean, the actual costs, so far, are working out better than we had initially thought. But this does need refinement, yes, before it's really a base number.

Edward Sterck - BMO Capital Markets Canada

Okay. So that $275 million I think it is for next year, that's based upon on

the underhand cut and fill and blast hole open stoping for the...

Robert Gannicott

No. No, it's really -- no, it's not. It's based on a kind of very preliminary view of what some savings should be for doing some of it with a different mining method. But it's not what I would consider to be the final guidance for next year. That can't happen until we have the mine plan.

Edward Sterck - BMO Capital Markets Canada

Okay. And then my final question is, just on the open pit, from -- well, from recollection, as you had ceased [indiscernible] operations next year, is that still the case? It looks as though the production from open pit for next year is a bit higher, at least than I've been expecting any way.

Robert Gannicott

Yes, it is supposed to cease production towards the end of next year. I would just say, the experience on the A-154 South pit was that as the pit got towards the very bottom, it was realized that the ground conditions were good enough that there could actually be another couple of sizable lifts taken at the bottom of the pit instead of doing it from underground and we did that. But it's hard to get -- to be slightly academic, whether you're doing a final bench from the bottom of the open pit or whether you're actually taking that bench as a first cut from underground. Other than the difference in the haulage method, the costs are pretty similar, so I don't think it has a dramatic impact when the open pit actually finalizes. But it should be sometime in the final quarter of the coming calendar year.

Edward Sterck - BMO Capital Markets Canada

Okay, great. And then just 1 last question on that. Can you provide -- just looking 1 year further ahead with the open pit potentially closed, what can we expect in terms of the increase in production from underground?

Robert Gannicott

The underground -- the hope is to get it up to 2 million tonnes. It's very -- I think it's pretty straightforward to do 1.8 million tonnes. There are some modifications -- further modifications that are being considered now that look very sensible that should make it easier to achieve, say, 2 million tonnes. That should be perfectly feasible, I think, in the upper reaches of the underground mine. Where it will get more challenging -- the challenge is haulage. It's not drill and blast. The challenge is haulage. And as you get deeper, of course, the hole gets longer, the driver's time for trucks and so on. So there are some innovative concepts being looked at, perhaps conveyor haulage of a sort, this kind of thing, in order to speed up haulage from the deeper parts of the mine. But the other important thing is, that as the underground mine gets deeper is when A-21 will come into production so that we've then got the supplementary tonnage from A-21 and could go back up to even north of 2 million tonnes again.

Operator

Your next question comes from the line of Daniela Nedialkova of Atlantic Equities.

Daniela Nedialkova - Atlantic Equities LLP

I wanted to focus a little bit more on the Chinese customer. I appreciate that you're just getting started in the mainland, but I was wondering if you could say anything about what percent of your sales on a global basis is made to Chinese customers and how that has been trending. And also, I suppose as you expand into mainland China, how familiar are they with the brand? Do you have a different kind of strategic approach towards that customer in the mainland versus how you're approaching the U.S. or European customer?

Frederic de Narp

Yes. So I don't want -- here, I have not deep knowledge. We are learning every day. We've -- we currently have 1 salon in Beijing with not even 1 window on the street since it is in the hotel of the Peninsula in Beijing. So it's difficult for us to talk about trends. But what I can tell you is that we -- different things. First is that we see as an approach, we are different from some other brand names as we don't see China as the El Dorado for mass luxury at all, and we see it as the most exclusive destination. In fact, I was, 4 weeks ago, launching the new Ultimate Adornments collection, high jewelry, very high jewelry collection in Shanghai to preannounce the coming of Harry Winston next year in Shanghai with -- in fact, our largest salon in the world will be in Shanghai opening first quarter next year. So we wanted to preannounce the launching and launch our new high jewelry collection in China before the rest of the world, never done. So we treat China as our priority, and we treat Chinese for what they are: Extremely sophisticated. The kind of Chinese clientele we see are extreme sophisticated. They care for quality, they care for authenticity, they care for heritage, they care for all of that and the craftsmanship. So it's pretty exciting. So 1996, Harry Winston was the first brand to enter the Forbidden City with a major jewelry exhibition. Now this next year, coming with the flagship store, the largest 1 in Shanghai. So we don't go with quantity, we go with quality. Next year, 3 salons will open in China. It's not many, and we don't want to go many. So this is the way we approach Chinese. So Chinese clients are clients you want to also particularly respect and do things like we did with Ultimate Adornments, or we will do in next Basel when we will launch a limited series of watches only for China, for example. So we embark into this level of sophistication with the Chinese clients. Chinese clientele around the world, they move, they ought to increase -- the number of travelers is ought to increase by 17% for the next 10 years, and that will not stop, and we see Chinese starting traveling. They are pretty -- we learn from them. For example, the percentage of bridal rings we sell from our London salons is extremely high to Chinese clients, which is unbelievable because we don't have visibility yet in mainland China, but they come already to us and purchase their engagement ring in our salon of London. So that's pretty encouraging. And last thing, we put Chinese-speaking people in all of the international destinations. Two or three months ago, we had 0 Chinese-speaking people in our salons. Now we start having with already some great results. In Las Vegas, in South Coast Plaza, Orange County, it's going to be the case in London, soon in Paris, but in these international hubs, we hire talented Chinese-speaking people.

Daniela Nedialkova - Atlantic Equities LLP

Okay, that's great. And I guess as a follow-up, in your salons around the world, other than the Chinese, do you see any particular other nationality kind of as a tourist inflow? I'm thinking maybe Russians, Middle East? Is there anything identifiable that would point you to opening salons in that particular region?

Frederic de Narp

Well, it's more the knowledge we have of the brand. The brand has developed, the watch activity for the last 20 years importantly in Russia and Middle East. And -- but we had no salon visibility. It was handled only by partners dealing with multi-brand stores, which is not the best to expand the image of the brands. So this is why we embark into immediately developing in the Middle East. So we start with Dubai. Dubai is the 1 hub that helps us serve our Middle Eastern clients, but also the Indian clients who oftentimes come to shop high-end in Dubai and Chinese clients coming to Dubai Mall now to shop also exponentially. Russia, it's a given. We've been having this solid partner, Mercury, with the best retailers actually in Russia, ones who invest in the brand, believes in the brand, loves the brand, and it's a development that is ought to happen.

Daniela Nedialkova - Atlantic Equities LLP

Okay. And my last follow-up is just can you say how much of your salons sales are made to local customers versus international visitors?

Frederic de Narp

A good question. In Japan, this is nearly close to 100%, so 95% is local. America, it is still very local for us, which is a good point because we grow with local clientele, and this is what we want to do. And most of the sales in America are still local. It's in Europe that it is really majority international.

Operator

Your next question comes from the line of Jafar Alam of Berenberg Bank.

Jafar Alam - Berenberg Bank, Research Division

Just 3 questions for me. [Indiscernible]

Robert Gannicott

Sorry, we can't hear you at all here.

Jafar Alam - Berenberg Bank, Research Division

Yes, sorry about that. Just 3 questions for me, the first one being on the constant currency price rates for Europe and Asia, if you'd be able to give us some figures there. And secondly, just to kind of give us some figures around, if you were to take out the Court of Jewels one-offs from last year, what does the constant-currency rates look like? Secondly, if you could give us a bit more information about demand so far in Q4 what that's looking like? And finally, last question, if you could speak about kind of your stockpiles in diamonds at the moment. Do you expect to sell those in Q4?

Robert Gannicott

Well while Cyrille is running notes on the other questions, I'll give you the answer to the last one while I could still remember it. The price of diamonds, the stockpile of diamonds, no, we wouldn't expect to sell it all in Q4. We wouldn't even particularly want to sell it all in Q4. The reason for stockpiling is -- the kind of goods that we're stockpiling are those that are similar to the diamonds that are coming out of the so called Marange diamond fields in Zimbabwe. These tend to be smaller diamonds. They are lower quality diamonds. And so these diamonds are being stockpiled in Zimbabwe because they couldn't get export licenses for them until last month. So there was a big burst of these things that have come on the market and in that kind of category has therefore depressed the prices. This surge of diamond production is not necessarily production, it's actually a surge of stockpiled goods which need to be sold by the people that have put up the costs of mining them. And so they're going to come -- they go -- they've washed through the market. It's probably take a few months for that type of diamond to get through the market, then we'll be on a steady-state again and the prices of those kind of articles will go up again. We don't wish to try and sell the kind of diamonds that we have that are similar to those in competition with them just simply because we believe that there's a better price not very far around the corner. So we expect to sell that kind of material, which is really mostly what we got stockpiled throughout the coming year, perhaps most of it gone by the end of the first 6 months, I would expect. But on the other hand, we are now selling it at for instance the sales that remain in this particular month are at full of velocity in the sense that we are selling diamonds with a dollar equivalent, sales are a dollar level that is compatible with the full cycle, full one month cycle of production from the mine. So we're already reducing the stockpile that we have to some extent. But we don't expect to get through it all in the fourth quarter. So that answers that question. Cyrille, have you got the other ones?

Cyrille Baudet

Laura will answer this one.

Laura Kiernan

Yes, as far as the constant currency, Jafar, we had -- sales in the U.S. were up 44% in the quarter and 53% for the year-to-date. Sales were down 31% in Europe or down 3.6% year-to-date. And sales in Asia, including Japan, were up 13.5% in the quarter and up 77% in the year-to-date period.

Jafar Alam - Berenberg Bank, Research Division

Brilliant.

Robert Gannicott

Was there another question? Is that right? Was there another part to your question?

Jafar Alam - Berenberg Bank, Research Division

That was -- well, the other question was kind of related to the constant currency, if you were to exclude the one-offs, because obviously, there was tough comparables. So if you were to exclude the one-offs from the Court of Jewels from last year, what does the currency rates look like? You may not have that information, but...

Laura Kiernan

Right. Jafar, we don't separately disclose that. However, what we did do in the segment footnote is we've listed the value of the high-value transaction. So in the segments, like for example, last quarter I think we said we had $55 million, this quarter, it's -- I don't even know that we disclosed something this quarter because we really didn't have sales at that level. Last year, in the quarter, we had Court of Jewels, so we do have a lot of high-value transactions in the last fourth quarter that will probably be in the segment footnote when we report our fourth quarter results.

Jafar Alam - Berenberg Bank, Research Division

Brilliant. Okay, cool. I'll go back and look at that. And just finally, margin for Q4, what does that look like at the moment?

Cyrille Baudet

Well, we see the Q4, I mean, it's difficult to have the crystal ball as we still -- the bulk of the holiday season is starting from now on. But what we will see is surely a sustained growth of the predictable business segments that we've grown steadily quarter after quarter, that we will continue to grow. Of course, we will -- last year, the fourth quarter had realized plus 89%, thanks to these big transactions that we will not -- some of these transactions will not be repeated this fourth quarter. But what counts for us is building the solid brand and developing in all these segments at the same time in all these countries, and that's working well, so we see the steady growth of this. So most probably, and naturally, an increase of margin in the fourth quarter, but a decrease of top sales. Top line, yes.

Operator

Your next question comes from the line of Richard Hatch of RBC.

Richard Hatch - RBC Capital Markets, LLC, Research Division

You've held back inventory until later when price improves. Can you just give a little detail as to when you see that improving, and do you feel that you're comfortable in your cash positions to holdback those sales going forward?

Robert Gannicott

Well, sorry, just didn't get part of the question. Okay. We already see prices improving. I mean, if you think about it, well, what really happened here was the world knew that the Marange goods were going to start to rise, but they didn't really know what they look like. They didn't know what the range of qualities, sizes and so on that were in there. So then, this big surge comes, so the world sort of stops for a while in fear of whether these things are going to swamp the entire diamond market for a little while. Then they arrived and everybody start to see what the kind of range of size and qualities are, realize that that's going to affect the pricing of those but also realizing that it doesn't affect the sizes or qualities that are outside of that type of production. So that's what's happened now, and so the diamond market has picked up again, prices have improved. Once the fear factor has been removed is where prices have generally improved, actually, so it's already on an improving trend. What was the other part of the question?

Cyrille Baudet

Cash.

Richard Hatch - RBC Capital Markets, LLC, Research Division

Yes, yes. The cash position, yes.

Robert Gannicott

Cyrille, I think we're about 80 --

Cyrille Baudet

Yes, we have cash balance of about $83 million and we have availability in our credit facility of around $6 million.

Robert Gannicott

So we have -- if you like, what we've done is deliberately [indiscernible] running the business on a cash basis, which is the way I sort of look at it is, what we've really done is sell enough diamonds – we’ve sold the ones where the pricing is still very strong. Where the pricing isn't so strong we sold some additional diamonds in order to comfortably cover our cash requirements. In other words, paying cash flows of Diavik, dealing with the expansion on the retail side and so on. So we've done that on the basis that we will get improved revenue for diamonds that we actually hold onto, even for quite a short period of time. There's not much point converting those diamonds to cash at low prices and then putting that money in the bank and collecting virtually no interest on it where the actual diamonds themselves perform better than a bank account. So that's the basic logic here.

Operator

You have a question from the line of Tanya Jakusconek of Scotia Capital.

Tanya Jakusconek - Scotia Capital Inc., Research Division

I've just got a couple of questions, one on Diavik and then one on the ETF, the diamond ETF summit was being proposed. Just on Diavik, just on A-21, Bob, we had originally talked about a capital cost of about $250 million to build, and with the inflation that's been heading through the whole industry, I mean, it seems that, that number will likely be low, maybe a little bit on what you see there. And if I understood correctly, it looks like A-21 is now coming in, in 2016. I think we had previously talked about 2015, so just checking on that. And then sustaining capital, is $40 million on 100% basis still a good number given all of these inflationary factors? Yes. So maybe just those on the Diavik first.

Robert Gannicott

Yes, okay. Well, yes, that's -- you're right, about that. I mean, A-21, although it's not really quite the same project now because the new -- they're now looking at a capital budget for it and -- but it includes -- the new budget includes all the pre-strip and then some additional equipment and then, also, I think a remote truck shop, so it's easier to service those pick vehicles, somewhere closer to where they're actually operating. So some of them are parameters. But nonetheless, the project, if you include all of the contingencies which are added onto it, we get into the $400 million to $450 million range, Tanya. We don't actually have a hard number, but it will be in there. It's not -- fortunately, it's not that sensitive, the capital, but nonetheless, you're right, this is -- the inflation that's happened affects all of these kind of projects, capital.

Tanya Jakusconek - Scotia Capital Inc., Research Division

Yes, for sure, especially up North, too, and -- yes.

Robert Gannicott

Yes, that's right. The production date isn't changing. I think it's on the cusp of 2015, '16. Whether -- I think we -- I think at the moment we are going to liberate ore in '15, but it's probably not going to get through the processing platform until beginning of '16. This is really kind of a little bit of a subtle difference about year-ends.

Tanya Jakusconek - Scotia Capital Inc., Research Division

Yes. And this is calendar '16, right, Bob?

Robert Gannicott

Yes, that's right. So that's that. And where else -- there was another part to your question.

Tanya Jakusconek - Scotia Capital Inc., Research Division

It was the sustaining capital $40 million that we had already talked about on 100% basis. Is that still a decent number, or should we inflate that, too?

Robert Gannicott

I think what you should do is wait until we get a new mining plan. I don't think it's going to be a material change, really. I mean, you sort of say, "Well, if it goes from $40 million to $60 million, isn't that material?" Well not really in the context of all the sort of OpEx of the project. I mean, I don't have any sphere that it's going to go up, and a lot of the -- well, really you might have gotten into the sustaining capital is actually being included now into specific -- has already been included in specific capital projects. So I don't have any great fear about that, but it wouldn't surprise me if it went up some.

Tanya Jakusconek - Scotia Capital Inc., Research Division

Okay. And actually before going to the ETF, Bob, just you mentioned that going underground, you're positively surprised, your costs are better than you anticipated. Is that due to the fact that the ground conditions are better and maybe you're getting less mining dilution or maybe just a bit of clarity on that?

Robert Gannicott

Yes, ground conditions are good, and I think probably also, I mean this is just the difficulty of making estimates. For [indiscernible] job for Rio to make accurate estimates. Here again, you pointed out the location we're in and so on. I think their estimates were made with a -- in a generous manner, and therefore, the actual -- what's happened is the actual cash falls have not been as high as they had budgeted.

Tanya Jakusconek - Scotia Capital Inc., Research Division

So they put maybe at fudge factor in? Yes?

Robert Gannicott

Yes, that's right.

Tanya Jakusconek - Scotia Capital Inc., Research Division

Okay. And maybe just on the ETF?

Robert Gannicott

The ETF. Well, ETF, of course, one of -- a lot of the customers for this were European family money. So when the sort of recent -- or most recent crisis sort of struck the world, these guys basically turned their attention to elsewhere. It wasn't that they went away. It's just that they started to have spent a lot of time managing their equity portfolio and trying to read thick prospectuses. However, that's kicked back into the year now, and I was just talking to Ray Simpson, who you know is putting that together. In fact I gather it's gone along very, very nicely now, and although we expect it to get it away by the end of our financial year, I think we probably got a couple of months of delay on that. But I don't think it's gone away, that's for sure.

Tanya Jakusconek - Scotia Capital Inc., Research Division

Okay. So sometime let's say closing mid next year, would that be fair?

Robert Gannicott

I think that would be probably on the pessimistic side.

Operator

[Operator Instructions] And your next question comes from the line of Matthew Hill of Mine Weekly.

Matthew Hill

Firstly, I was hoping you could give some comment on what sort of impact, ongoing impact, you might see in the diamond market from the Zimbabwe supplies, on the lower quality side, obviously.

Robert Gannicott

I was up early this morning to actually read your own notes on our results, and I would just like to correct about -- I think your headline says that depressed diamond prices have pushed us into a loss. I mean, what pushed us into a loss was taking the write-down on the page. In fact, diamond prices are still 25% higher than they were last year. In fact, that's pretty -- that's still a fairly comfortable number. What do I see with respect to going forward? I think we're going to have probably about 3 months of, if you like, the sustained lower pricing in the smaller cheaper goods. Fortunately that doesn't affect us greatly because the bulk of our value doesn't come from those categories of diamonds. But I think it's caused all producers I'm sure -- although I know I'm not privy to people's stocks, of course, but I'm quite sure that all the other producers are holding more stock than they normally would at this time. And so if we think about then getting all of that sold through the system, I think it's going to take us most of next year. So my own kind of planning, if you like, is that -- not to anticipate rough diamond price rises overall throughout next year. I mean, there will definitely some categories that go up, some categories that don't. But I don't -- I think the overall result is likely to be that we sort of more or less stay where we are for a year despite the fact that there is clearly a growing imbalance between demand and supply, which will definitely mean higher prices in even the medium-term. But I think if we're talking about the next 3 or 4 quarters, I think, one should think about probably flat diamond pricing, albeit at a level that's 25% higher than it was last year.

Matthew Hill

Okay, great. And then just lastly, is Harry Winston at all interested in participating in BHP Billiton's review process for its Canadian diamond assets, which, of course, could present a once-in-a-life opportunity to buy a large diamond mine in a stable jurisdiction such as Canada?

Robert Gannicott

Yes. Well, we are, of course, familiar with the stable jurisdiction that is Canada and, of course, familiar with the area. We really -- we don't obviously discuss M&A initiatives on conference calls for obvious reasons. Usually, as you know, these things tend to involve confidentiality agreements. Clearly, it's of some interest, but nevertheless, it is close to the end of its existing life and, of course, there is a reclamation liability there as well.

Operator

And your next question comes from the line of Edward Sterck of BMO.

Edward Sterck - BMO Capital Markets Canada

So I just have one follow-up question. Am I correct in thinking it's been a bit warmer than normal up in the north so far this winter? And if that is right, how is the sort of ice road shaping up at the moment?

Robert Gannicott

I don't even think it is right. I mean, it actually got quite cold very early and then -- quite early in the fall this year. I mean, the optimal conditions for winter road are like it's cold before you get much snow. And I think this year would be characterized as not bad. It got cold, but actually, it was fairly quickly got some snowfall. And of course, the snowfall does 2 things: One, is that it insulates the ice that's already built, so you don't get as much thermal transmission between the ice and the cold area above it. It becomes a snow blanket on it. The other thing is the way that the snow, if the ice is thin and produces enough weight, that it pushes the ice down and you get overflow of water on top of the ice, you get a real lumpy surface, which nobody likes very much. Yes, my understanding is, we're okay with the winter road this year. Because really, what's already happened is what's important on the winter road as opposed to -- it always gets -- it's always going to be cold in January and February. We don't worry about that. It's just a question of whether you've built ice and -- particularly in the period mid-November to mid-December. My understanding is that we're pretty good.

Operator

And there are no further questions at this time. I'd like to turn the call back over to management for closing remarks.

Robert Gannicott

Okay, thank you. One special thank you, I think, to -- because it's been a complicated quarter. We stockpiled some goods. In other words, we don't make sales around the mine. It introduces another layer of complexity, which -- to something that's already a complex business. And for those of you that have the patience and -- to actually analyze this and publish the analysis, just a special thanks for having made the effort to actually try and understand this complexity. So thank you, all.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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