Harry Winston Diamond Management Discusses Q1 2013 Results - Earnings Call Transcript

Jun. 7.12 | About: Dominion Diamond (DDC)

Harry Winston Diamond (HWD) Q1 2013 Earnings Call June 7, 2012 8:30 AM ET

Executives

Robert A. Gannicott - Chairman and Chief Executive Officer

Cyrille Baudet - Group Chief Financial Officer

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

Laura Kiernan - Director of Investor Relations

Analysts

Irene Nattel - RBC Capital Markets, LLC, Research Division

Oliver Chen - Citigroup Inc, Research Division

John Hughes - Desjardins Securities Inc., Research Division

Brian MacArthur - UBS Investment Bank, Research Division

Tanya M. Jakusconek - Scotiabank Global Banking and Market, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Harry Winston Diamond Corporation's Fiscal Year 2013 First Quarter Conference Call. My name is Janeda, and I will be your conference coordinator 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 filings with Canadian and United States securities regulatory authorities and can be found at www.sedar.com and www.sec.gov.

During today's call, we will also be discussing certain non-GAAP financial measures such as EBITDA. EBITDA does not have a standardized meaning according to GAAP, and Harry Winston defines it as sale minus cost of sales in selling, general and administrative expenses. Please see the press release and the MD&A we filed yesterday for further information about this non-GAAP measure. 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 A. Gannicott

Good morning, everyone, and welcome to the Harry Winston first quarter earnings call. We are of course are pleased to be able to present these results of our first quarter this year. As compared to the equivalent quarter the prior year, we've sold more of our various products for rough diamonds, jewelry, watches, improved our operating margins and delivered a strongly improved operating profit. We're in different locations with this call. I'm in a rather echo-ey room in Yellowknife, in the Northwest Territories in Canada. Our CFO, Cyrille Baudet, and the President and Chief Executive of our luxury brand division are both together in New York.

So we're going to begin the call with a report from Cyrille on the financial highlights and then that will be followed by Frédéric who will discuss the luxury brand business, and then I'm going to come back on the call after that to deal with the mining and rough diamond business, and then we'll take your questions and then we'll finally close. So start the proceedings then, Cyrille, over to you.

Cyrille Baudet

Thank you, Bob, and good morning, everyone. Bob and Frédéric will discuss our segment results for the quarter and the outlook in detail. I'd like to speak about our consolidated results for the same period. Our consolidated sales for the quarter were $192 million with $89 million from the mining segment and $103 million from the luxury brand segments. This represents an increase of 34% from the comparable quarter of the prior year both at actual exchange rate and constant rate with higher sales in both segments.

Our consolidated gross margin in Q1 were 31.8%, an increase of 510 basis points from the comparable quarter of the prior year of 33% -- 38.1%, sorry, 38.1%. The mining and luxury brand segments both generated higher gross margins.

Mining gross margin as a percentage of sales over the first quarter was 21.2% versus 13.9% in the comparable prior-year period. Gross margin for mining benefited from 116% increase in volume of carats sold which is around 1 million carat partially offset by a 34% lower achieved averaged price per carat, down 34% to $88 a carat.

This results from the inclusion of this quarter of lower-priced diamonds originally held over from the company's decision to hold inventory at October 31, 2011. Had we sold only the last production sheet for the quarter, the estimated achieved price would have been about $125 per carat based on the price achieved in the last tail of the quarter.

The luxury brand segment gross margin as a percentage of sale was 52.6% versus 47.5% in the comparable prior-year period. The 510 basis points of improvement in the quarter was driven primarily by increased sales of higher margin access and core products. The first quarter of the prior year included a $5.2 million high value transaction but was not repeated in the current quarter. Consolidated G&A expenses increased 28% to $54.7 million in the first fiscal quarter of 2013 versus $42.8 million in the prior-year period. SG&A for the mining segment decreased $2.1 million in the quarter primarily due to executive severance incurred last year that we didn't repeat this year.

In the luxury brand segment, SG&A increased by $12.6 million in the first quarter or 36% versus last year. The increase was primarily due to higher advertising, marketing and selling expenses, including the opening of the new flagship salon in Shanghai, China. The SG&A spending is supporting our long-term growth strategy of expansion of our distribution network, the introduction of new jewelry and watch products and our brand building initiatives. The prior-year period included a recovery of interest premium amounting to $2 million that didn't happen again this year.

Corporate SG&A increased $1.4 million to $4.8 million for the quarter, primarily due to severance and to travel expenses and salaries related to additional corporate employees. Consolidated operating profit for the quarter increased by nearly 300% to $18.7 million versus $4.7 million last year. EBITDA increased by 77% in the quarter to $44.2 million versus $25 million last year.

Our profit are still largely being driven by the mining segment as the luxury brand is in growth phase. The evolution of the luxury brand profit and EBITDA continues to move in the right direction. Our liquidity is solid with cash of $113 million and availability under our credit facility of $102 million at April 30.

The mining segment is currently in a net cash position with $75 million of credit available. The senior secured facility has 2 one-year extension available beyond next year's maturity.

The company is in the process of refinancing its senior credit facility for the luxury brand segments, which has a net debt position of $218 million. Now I would like to turn it over to Frédéric.

Frederic de Narp

Thank you, Cyrille. The global demand for luxury products remained strong and broad-based. Tourism from emerging market continues to fuel consumer demand for branding high-end luxury products in key markets around the world. This past quarter, we have continued having evidence that our strategy is working as we execute on our long-term vision by expanding our distribution network, posting powerful branding events, introducing new jewelry and timepieces product supported by strong advertising campaign and strengthening our supply chain.

During April, we celebrated the opening of our first freestanding pavilion flagship store in XinTianDi, Shanghai. The first of its kind concept was designed by famed architect William Sofield. The ribbon cutting ceremony was attended by the Hollywood celebrities from the television show The Gossip Girls. The opening event was followed by gala dinner for clients and journalists held on the nearby Taiping Lake. And at the event we showcased the history of Harry Winston, as well as the heritage collections and timepieces.

Our guests were entertained by performance pop star, Jay Chou, very famous in China. And this was truly a significant event in the history of Harry Winston, representing the grand introduction of the brand to China, a market that has a huge potential for our brand. The event generated significant editorial coverage inside China, as well as outside China.

During March, in the month of March, we presented our new timepieces product at the Basel Watch Fair in Switzerland. The new timepiece collection, including the Opus 12 and the introduction of the Feather collection were very well received by station journalists and clients from around the world. The overall mood of the sale was very positive and as a result of increasing global demand of timepieces. At the end of the quarter, we launched our new bridal collection, the Belle collection, and this new collection received great editorial coverage.

The sales during the first quarter were $103 million, up 26.3% on a current exchange basis and up 26.2% on a constant exchange basis. Increasing sales during the quarter was driven by strong regional performance outside of America. In Japan, Europe and Asia. During the prior year first quarter in America there was a significant high-value transaction that was not repeated in the current year period. We continue to experience strong growth in our access and core product segments including bridal, timepieces and jewelry collections.

Regionally and at constant exchange rate, sales for the first quarter in Europe were up 73%, Japan was up 43%, America was down by 9% and Asia outside of Japan was up 39%. Europe generated strong sales across all product segments. Japan experienced significantly higher bridal and timepiece sales especially when compared to the prior-year period when the business in Japan was negatively impacted by the earthquake and the tsunami.

Asia outside of Japan benefited from higher sales of old products, primarily as a result of the opening of 2 new centers in Shanghai, China. The America region experienced growth of core and access products including bridal, timepieces and jewelry collection, offset by a significant high-value transaction in the prior year that was not repeated. The significant improvement in gross margin for the quarter is a very positive trend that should continue as we expand our access and core business and strengthen our supply chain.

The operating profit in the quarter increased to $7.1 million or 6.9% of sales compared with $4.2 million and 5.2% of sales in the prior year quarter. Over the long term, we believe that demand for the jewelry products from strong brands will continue to grow. In the near term, the impact of the debt crisis in Europe and the economic slowdown in China will present challenges.

We expect the sales of core and access product to continue to grow during the second quarter. However, we do not expect to anniversary the high-value low-margin transactions, which totaled $55.6 million from last year's second quarter. We will continue to expand our distribution network in prime locations around the world, allowing Harry Winston to benefit from the increasing mobility of high-end luxury consumers.

A new licensed salon has just opened last week in Moscow on Tretyakovsky Street and another licensed salon is expected to open in Kuwait City in the fall. Our wholesale timepiece distribution network is planning to expand to approximately 220 doors by year end.

We are reconfirming our long-term vision through 2016 as follows: growing sales at a compound annual growth rate in the midteens, improving our growth margin to the low 50s, improving our operating profit margins to the low to mid teens. We also plan to expand our distribution network to approximately 35 directly operated salons and 15 licensed salons and to grow to 300 wholesale timepiece doors by the end of fiscal 2016.

We are very pleased with the results that were achieved in the first quarter as we continue to execute on our long-term strategy. We are creating value for the shareholders as we consistently grow sales and profit, as well as the long-term value of our brand. I'm very confident we will continue to achieve our objectives. I would like now to pass the call back to Bob.

Robert A. Gannicott

Well thank you, of course, Cyrille and Frédéric and I'd like to turn our attention then to the mining and rough diamond sales segment, which is still the engine room of our balance sheet, although, as you can, see the brand is now gaining momentum.

The first quarter of the year is never the high point of our mining year. Most of our ore production is still coming from an open pit for the balance of this year. And in the open pit, very low temperatures and blowing snows that occurred in midwinter do interrupt production. It's also a period when operational attention is deflected by the demands of the winter road, all these logistics, et cetera, so that we never expect to deliver a full quarter of the full year's target production during the first quarter.

In the underground portion of the mine, the development schedule has now call out the plant making it easier to focus on improving the underground ore production velocity. But the diamond deliveries have already strongly increased as the better weather conditions take hold and we currently see no problem achieving the more than 8 million carats in the forecast for the year. Diamond sales in the quarter were strong, encouraging us to sell then some retained stocks of lower quality diamonds has improved demand met our price expectations.

We've always evaluated potential diamond industry investments we continue to do so. With changes in the industry there are no potential opportunities in the areas of Northern Canada that we understand the best. The order however, all is going to be mindful of the increased risks presented by the volatile conditions of the day, as well as the necessity to purchase value rather than just volume. We've been very disciplined about that throughout our history and we will continue to be so.

Quarterly reports are, of course, by their very nature retrospective. The world has certainly changed since the end of April when we closed this first quarter, but probably not as much in the diamond industry as many of you would imagine from the news of other commodity price changes. Our jewelry and watch sales in May remained robust with continued growth. This appears to be the case with other hard luxury retailers as well.

Eurozone residence have always been a relatively small segment of the customer base of what is, after all, an American brand, while the improvements in Japan driven off a strong yen certainly do quite dramatically affect us, for example. Because the European banks are being important additional lenders for the diamond polishing industry, their current liquidity problems do affect the supply chain.

Diamond polishers are restricting their rough demand and are prepared to sell diamond inventory while they take a wait-and-see position to the risk of a more global slowdown affecting the industry. Although China is now the largest consumer of many bulk commodities such as iron ore and copper, it is still relatively small in diamond consumption terms. This continued growth in diamond demand is of course important, but it is still marriage ceremonies in America and Japan that underpin the diamond industry for the foreseeable future.

So thanks for listening to us. We're ready to take your questions, and then I'll just come back to close the call at the end of the question period. So operator, if you want to just switch in the questions, please.

Question-and-Answer Session

Operator

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

Irene Nattel - RBC Capital Markets, LLC, Research Division

I guess, what I'm really trying to get my mind around is what is happening right now in the space versus what the fear is of where we might be going. Because if we use your wording, Bob, retrospectively Q1 was a very good solid quarter. You noted that sales demand was in luxury brand segment continues -- continued to be robust through May and yet we are seeing this tightening of liquidity from the diamond banks. We're seeing the diamond polishers selling down inventory. Everyone's kind of holding their breath to see what happens both in Europe and in China. So is it really just more of a -- we're not sure where this is going or there's something out there in the environment that makes us think that we are actually in the early stages of this slowdown.

Robert A. Gannicott

Well, I think, seeing from the diamond perspective, there is nothing out there that signals a change at the current time. The reason that the polishing, the processing part of the chain gets affected, of course, is because the plans tying up the credit, the people that are the weaker members of the diamond polishing industry are obviously then constrained in what they can buy. The stronger members of the diamond polishing industry that has cash reserves seizes an opportunity to try and find raw material cheaply. This is why we have been withholding stocks of various items and continue to do so. In other words, we are sitting there finding that we cannot actually purchase polished diamonds for our jewelry industry significantly cheaper than they were before. I mean, yes, you can get some items at 3% or 4% below what they were 3 months ago but it's hardly a collapse. Whereas on the rough diamond side, we have said we got a situation where the diamonds that are used to make those polished diamonds, the guys that are buying them are looking for deep discounts purely because they are one of the few people in the business that have got cash, so it's obviously more sensible to hold on to the diamonds because you know that you're going to sell -- those kind of diamonds, you're going to sell them for more later. But I would say and I'm sure Frédéric and Cyrille will reinforce this, we do not see any changes in our watch equity -- the sales -- the change that we do see are positive. We continue to see growth in our jewelry and in our timepiece businesses. And I believe that the other people in the industry experience the same thing. I know that Graff during his IPO marketing campaign made the same comment about the month of May or the month of April too because these are on a calendar year end. So the 2 months of April and May will continue to be not just holding on gains but actually significant improvements still. I believe that, that is still a general thing throughout the industry. I guess, that's the point that I was trying to make when I said, obviously, the construction appetite in Japan has huge effects on the demand for basic commodities because China is by far the biggest consumer of those basic commodities now so that the change in their appetite has a big effect on the demand and therefore the price. China, although, of course, very pleased to see it and the Chinese tourisms that drives purchases in the luxury goods centers around the world, it's still not a very -- it's not a very big component of the diamond jewelry business. It's in the teens, whereas, if we're talking about copper business, I think China is now more than 60% of copper uptake for instance. So changes -- sudden changes in China, which -- there been some -- although, I guess, their effort to reinflate the economy there. But the changes in China have not had dramatic effect on our industry that they have on the exchange traded bulk commodities.

Irene Nattel - RBC Capital Markets, LLC, Research Division

That's great and that's really helpful, Bob. If I could just ask a question now about -- on the luxury brand side, obviously, very encouraging to see the increased sales in the core and access segment of the mix, which should be more repeatable and I'm wondering whether is it -- a lot of extending the reach, attracting new customers, is that growth across? Are you seeing it more sort in the, say, the newer collection jewelry versus timepieces? If you could just talk a little bit around just the nature of the growth where you're seeing it coming from.

Frederic de Narp

Frédéric speaking. Yes. We have to know that the brand already at this very moment, we have 25 salons. We have 19 last year, and we're going to have 28 salons at the end of this year, and so the brand is growing. So the look of the brand, the visibility and awareness of the brand is growing at a very strong path. When you see the look of our salon revenues, the brand, the exchange on the 6,000 salons we just opened last month. So the look and the verge around the brand is exponentially increasing so that has surely a positive effect on the traffic we have in our stores that make us not very much comparable to last year and more to come. I see a demand from emerging countries, the accelerated accretion of pockets of wealth from emerging countries and these people travel and the tourism is exponentially increasing and that has a positive impact. The growth for our core and access is coming very, very strongly on bridal and there are so much more opportunities to grow the bridal segment. I repeat, we are just selling 2,000 engagement rings and wedding bands a year, but we have so much room to increase the bridal segment and it happens that people get married, continue and it's steady and there is an appeal for authentic brand offering, rare jewelry like quality luxury that we're representing at Harry Winston that is absolutely unique and it's here. So this emerging clientele, people might think they don't know anything about luxury, they already know after 2 or 3 years after becoming rich, they are already super quickly educated and reaching out to brands that are really authentic and high end like ours and therefore, in quest for quality. So we see this growth coming for core access strongly in watches and bridal. And the last point is Japan. Japan is a fantastic market for us because Japan they want small items of the highest quality and this is what we are about. Sometimes we are not that small, but we are about highest quality. And the Japanese people love us and the growth rate in Japan 43% is also strong, and last year we have not been, so affected by the tsunami at the end of this year, at the end of the day. And we're still growing exponentially in Japan because there is an appeal for quality. So it's coming from all these elements, Irene, and it's encouraging, it's very encouraging because the growth continues quarter-after-quarter, month-after-month. It is still here and this is what we want, so we nearly, in 24 months, we nearly doubled the volumes of jewelry units we sold.

Irene Nattel - RBC Capital Markets, LLC, Research Division

That's great. And then a couple of housekeeping items if I may. The increase in cash on the balance sheet of $27 million, is that by any chance related to the luxury brand segments and maybe some prepayment of pieces that have been ordered or is that really from the mining side? That was the first question, and the second one is just around tax rate for the year.

Cyrille Baudet

Irene, the increase of cash in the balance sheet is related to the mining side.

Irene Nattel - RBC Capital Markets, LLC, Research Division

Okay. And the tax rate?

Laura Kiernan

Can you be more specific with your question?

Irene Nattel - RBC Capital Markets, LLC, Research Division

Sure. Just wondering what we should be using as a tax -- I mean, I know the tax rate bounces around on a quarterly basis but just wondering, generally speaking, what we should be using for modeling purposes for the tax rate.

Laura Kiernan

Generally, about an effective tax rate of about 28%.

Operator

[Operator Instructions] Your next question comes from the line of Oliver Chen with Citibank.

Oliver Chen - Citigroup Inc, Research Division

We had a question related to how we should think about modeling the average price per carat going forward. The $88 was lower than what we expected, but I see that you guys mentioned that $125 number. I mean, do you see that, that is a sustainable run rate? Or how should we think about 2Q, 3Q, 4Q and what might happen in the evolution of the price per carat?

Robert A. Gannicott

What you should do, and I think Oliver, we have presented an ore mix going forward from the year. We published the prices on a quarterly basis. We put the prices in for each of the components of the ore that is mined. In other words, each one of these pipes has a different price per carat, so the average price per carat is, of course, based on the proportion of each one of those pipes that's mined during the year. And I think we have given an ore mix for the year, is that correct, Laura?

Laura Kiernan

Yes, we have about 0.5 million tons each from A-154 North and South and 1 million tons from A-418.

Robert A. Gannicott

Right. And I think the only modification to that -- [indiscernible] just attended a joint venture meeting where, of course, each time we have one of those there are small tweaks that are made to the operating plan. And it may well be we actually mine more of the A-154 site, which is a higher grade, so more carats, but it's also relatively high value carats compared to 418. So they may mine more of that and less of A-418, however, if we do that, it will drop the total tonnage down a bit. I mean, it's obviously we're only going to be doing it because it's a value proposition. I guess, what I'd do is, if you want us to give you a numeric answer to that, we have to take a look at these things ourselves and come back at you, but I think we are looking on an average price for the year, our own forecast average price for the year about $100, $135, but I think, we'll come back to you with something that's a little more accurate.

Oliver Chen - Citigroup Inc, Research Division

Okay. Well, you made strategic decisions in this past quarter to hold back some of the inventory given the liquidity concerns on the liquidity supply-demand dynamics. Is that expected to continue just because if we did the math previously that way, Q1 should have been much higher?

Robert A. Gannicott

Well, no. Q1 -- what happened in Q1 was we have retained a lot of carats that were very low value from the previous year, the previous quarter. So because the diamond market, the rough diamond market became quite strong in Q1, we decided to move those diamonds into the market. So if we were selling -- we diluted our mine production, if you like, with a lot of material that's within the sort of $10 to $20 per carat range, so a lot more carats, but the average value goes down. But you still end up with more value than you would have if you were selling just the run of mine product. However, the other end of the scale, there's some higher value diamonds in particular, higher value rough diamonds where we believe the market price of today date isn't representing the price that we have to pay for the polished diamonds that come out of those goods. And therefore, we hold those because frankly, it's better than turning them into cash. And keeping the cash in the bank [indiscernible] with no interest. In other words, diamond prices, those items are going to improve more than the interest rate would justify conversion to cash. We're going to continue to do that. That's -- the nimbleness in doing that is part of the benefit that we get from owning a luxury jeweler. We know what the diamond prices that one has to pay for the finished product, and therefore, there's got to be a good correlation between that and the raw material before we're prepared to sell the raw material particularly as we don't have the immediate short-term need of the cash. So I'm afraid that always going to continue. I realize it makes it somewhat more complicated to model it but nonetheless, it's good business.

Oliver Chen - Citigroup Inc, Research Division

And on the luxury side, the gross margin is very impressive. Congrats. It's the highest in many quarters, 5 to 6 quarters. Is that the run rate we should expect and how should we think about the gross margin sequentially, do you think that you're going to be in the low 50s 2, 3Q, 4Q, or are there year-over-year comparison considerations?

Cyrille Baudet

Yes, I mean, what is important to note in the first quarter is that we did not repeat the high-value transaction that we had last year. So clearly, the evolution in the mix that is more favorable to access and core is highly reflected in Q1. It doesn't mean that in the subsequent quarter, we're not going to welcome some more high jewelry sales with lower margin, but the fundamental trend, which is to increase the weight of access and core, sales mix is going to continue. So there is some volatility to expect due to high-value transaction that comes and that takes some time to be materialized. Thus, on the long-term, there is clearly a trend that is not going to change.

Oliver Chen - Citigroup Inc, Research Division

Cyrille, do you have a sense? It looks great. So you have a sense for the full year in the luxury GM, do you think you're going to get closer to your longer-range targets of low 50s?

Cyrille Baudet

We do hope so and we're doing everything we know how to do to get that result.

Oliver Chen - Citigroup Inc, Research Division

And my last question is the run rate on the SG&A mining. It looked like a really great number, that 2.5. Is that reasonable run rate in terms of the dollars and SG&A? How should we think about modeling that? I was thinking previously, it was closer to $6 million every quarter.

Cyrille Baudet

Yes, don't forget that since last year, we are reporting a separate segment, which is the corporate expense, which allows us to clearly segregate what is the cost of being a group and what is the cost of being a public company and what pertains to the mining activity. So this is the novelty in the way of reporting our numbers. With that said, you can probably model run rate from the SG&A on the mining because of we've taken most of the volatile elements out of the mining SG&A.

Operator

Your next question comes from the line of John Hughes with Desjardins Securities.

John Hughes - Desjardins Securities Inc., Research Division

Bob, just a quick question on the mine side of A-21 and that prefeasibility study and the fact that this is now looking like the dike is going to be constructed and no underground. I'm wondering whether -- is there any change in terms of access to any of that tonnage, I think it's around 3 to 4 million tons at A-21?

Robert A. Gannicott

Yes, it's only slight. I can't remember, John, exactly what it is. But if you recall, the shape of A-21, it's not like the other pipes. It's more like the -- it's more like a martini glass. So it – it necks down to a narrow stem very quickly. The tonnage is in the narrow stem will not be accessible from the conventional open pit, although, there is a sort of a preliminary plan, I'd say, to look at when the open pit is finished, flooding the bottom of it and then floating a barge in the bottom of that and basically underwater mining part of the stem, let's call it that. It doesn't make much of an impact. Just to give you then a bit more update on A-21 even though you haven't asked for it is the meeting that we just had confirmed that this goes forward for funding applications of Rio for the detailed feasibility study to commence, which is not very [indiscernible]. The way that this was done was that pre-feasibility study is that virtually everything that's in the -- normally, in the feasibility study except for the final pricing because of course contractor cost and so on change with time, so that is now being done. We released the funds that are being applied for now. If that's okay, then we begin. As we begin crushing and screening the rock is used to construct the dike, we would be starting that in November of this year.

John Hughes - Desjardins Securities Inc., Research Division

And what kind of construction timeframe are you anticipating?

Robert A. Gannicott

It's 2 seasons. So basically, you go through next summer and the summer thereafter for 2013 and '14 and then you start the pre-strip right after that and during production or January 2017, I think.

John Hughes - Desjardins Securities Inc., Research Division

I see. So for that $200 million that is your component of the $500 million total capital, that's not short-term -- really a short-term issue for you in terms of. . .

Robert A. Gannicott

No, it's not. In fact, those are the sort of things I was looking at. I think the additional study work that has to be done on 100% basis is about $4.5 million. The crushing, the complete crushing program, not just this year, but next year as well, is about $40 million. Where you get into the serious money is when you start doing the dyke cutoff wall, so that comes about a year and a half.

John Hughes - Desjardins Securities Inc., Research Division

Okay. Last question as well, and it's more balance sheet related, but it was noted that you would be looking to refinance a large portion of that current interest-bearing loan and bordering on the balance sheet at the end of April. And I'm just wondering whether that happens this quarter type of thing or...

Robert A. Gannicott

That relates -- that definitely relates to the luxury goods business. And it's of course linked to -- its secured by, the diamond jewelry inventory on watches that the company holds. But Cyrille, do you want to comment on that?

Cyrille Baudet

Yes, I mean we are currently in the refinancing of this trade facility. The trade facility expire at the end of the year, and we are actually working on it. We hope to conclude in Q2 or Q3 of this year.

Operator

Your next question comes from the line of Brian MacArthur with UBS.

Brian MacArthur - UBS Investment Bank, Research Division

I just want to go back to exactly what the 125 carats for the quarter. You said sort of production have sold. Is that -- that's obviously x selling the held back inventory from last year, the lower value staff [indiscernible] staff, but did it also exclude the higher value staff that you've held back now?

Robert A. Gannicott

Brian, let me explain that because that's important. What we're saying with that is had we just taken the material that was delivered from the mine during the first quarter, had we just taken that, added nothing to it and taken nothing away from it and sold it at the prices that were prevailing during the quarter, because we know what those prices are because we know the price of each item that's in the makeup because we're selling in England. So had we just sold the mine production, the prices that prevailed during the quarter, we would've received $125 a carat. The reason for putting that in is to give you a reference to what the value of the mine production is for the quarter.

Brian MacArthur - UBS Investment Bank, Research Division

Right. So effectively, it's just weighted average to that guidance you give through the 4 or 3 different zones plus the reprocessed stuff and you just put that with that thing. And then after that, you held back those and are the prices you gave us in that chart last quarter and then you held back some of that higher value staff that's still sitting in inventory. So cash is still to come out.

Robert A. Gannicott

Yes, that's right. We held back higher value material and we sold stock of lower value material that we were pulling for the prior quarter.

Brian MacArthur - UBS Investment Bank, Research Division

And you did make comments on the whole thing. Is it just the very -- I mean, you're obviously holding back to the very high end. Are you seeing weakness through all the different qualities if I want to put it that way or is it just more at the high end at the moment?

Robert A. Gannicott

Yes, it's larger high-end material at the moment. And it's not because of -- it's not actually because of lack of demand at the retail side as I say it. It appears to be that the larger diamond polishers that do have cash resources and aren't relying on bank credit, so you see this is an opportunity. Say, okay, we've got cash boys. If we want to sell, sell to us but we want a discount. Well, if you don't need the cash then there's no need to sell it at a discount. I mean, we could still see the items that are made from this kind of material selling very well.

Operator

Your next question comes from the line of Tanya Jakusconek with Scotiabank.

Tanya M. Jakusconek - Scotiabank Global Banking and Market, Research Division

John asked my question on pipe A-21. Bob, so you don't have to review that again. But I've got a couple of questions. At the Analyst Day, you mentioned a potentially working with Rio for the new mine plan. Bob, should we hold our breath on this new mine plant or do we need to see the sale of the asset of what Rio Tinto is doing with their diamond division before we get this mine plan?

Robert A. Gannicott

Yes, I'll have the question at the JV meeting, which of course is the Yellowknife level meeting that the little London I think is that the question I have to take up with them in London. You're quite right. We should have a mine plan available and I think we can do that, but I just need to -- this is going to probably take us a few weeks -- I don't want to deliberately upset the joint venture partner, so I'm just go and talk to them in London first, and then we'll come up with the exact protocol and how we do that.

Tanya M. Jakusconek - Scotiabank Global Banking and Market, Research Division

And then maybe just an update on the diamond fund and whatever is going on in the market, these economic situations. Where are we on that? Have we seen slippage? Just maybe an update on that diamond fund…

Robert A. Gannicott

Well, we've clearly see anything slippage in the timeline. However, I'd say the interest is strong and they're actually -- the people the marketing that are actually on tour right now and I have a couple of really big customers. It's like an environment like this. It's hard to get people to actually step up and close on anything. I mean, even the Graff IPO, but I'd say it's looking better now than it has for the last 5 or 6 months.

Tanya M. Jakusconek - Scotiabank Global Banking and Market, Research Division

Okay. And then just my final question. Just Bob, at the Analyst Day, you talked about the opportunities in Canadian Arctic on the sale of a caddie [ph], and obviously, with Rio on that diamond division. I think you mentioned on the caddie [ph] that it's sort of was a 3 to 4 month process in. In terms of resolving that and I think you had mentioned on Rio that it was probably a year process, is that still fair to say or has anything changed there?

Robert A. Gannicott

I think, well, Rio's process is Rio's process. And I'm reluctant to make comments about Rio's business. I think, as I understand it, what they have informed the marketplace is that they are sort of process of actually making a separation between Rio's corporate business and this separate diamond entity will take something like 6 months, and then thereafter, they will then look at it, what they want to do with this separated entity, whether they want to do a trade sale, try and float it publicly, whatever. But as I say, I think, a [indiscernible] question to Rio Tinto rather than they are for us.

Tanya M. Jakusconek - Scotiabank Global Banking and Market, Research Division

Okay. And then you had mentioned on the BHP, the 3- to 4-month process, is that something that you still see? Just on the Analyst Days.

Robert A. Gannicott

Yes, I know. Yes, I think that's probably still realistic. I mean, BHP before they would get anything close with anybody would likely be about the end of the year. Sorry, couldn't be a bit more specific about some of them.

Operator

At this time, we have no further questions. I would now like to turn the call back over to Mr. Robert Gannicott for any closing remarks.

Robert A. Gannicott

Okay, thanks very much. I'm sorry, just rolling through [indiscernible] here at the end of my closing remarks. I mean, obviously, we presented a quarter here, the most important thing, I think to me about this last quarter is that it confirms that the efforts that we've been making to broaden the base of our watch and jewelry business are being successful. We are not abandoning the high price point business that is the original business of Harry Winston, and it remains the signature of this very well respected brand. What we are doing is successfully bolting on to that, a much broader business that sells to a much broader client range particularly bridal business, more access jewelry and more accessible price point watches.

We expect this trend to continue and in fact, we expect it to accelerate as we gradually integrate properly the functions of design, manufacturing, marketing and sales to a truly coordinated unit. So thank you all for joining us today. And for those of you who may have missed our Analyst and Investor Day, you can still listen in to the webcast and download the presentations if you wish. And we're also of course willing to take follow-up questions you may think of following the end of the call here. So thanks for joining us and enjoy your summer. Thank you.

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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