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

Executives

Robert A. Gannicott - Chairman and Chief Executive Officer

Cyrille Baudet - Group Chief Financial Officer

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

James R. W. Pounds - Executive Vice President of Buying and Sourcing

Laura Kiernan - Director of Investor Relations

Analysts

Irene Nattel - RBC Capital Markets, LLC, Research Division

Oliver Chen - Citigroup Inc, Research Division

Brian MacArthur - UBS Investment Bank, Research Division

Des Kilalea - RBC Capital Markets, LLC, Research Division

Edward Sterck - BMO Capital Markets Canada

Harry Winston Diamond (HWD) Q2 2013 Earnings Call September 6, 2012 8:30 AM ET

Operator

Ladies and gentlemen, and welcome to the Harry Winston Diamond Corporation's Fiscal Year 2013 Second Quarter Conference Call. My name is Stephanie, 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 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, and EBITDA does not have standardized meaning according to GAAP, and Harry Winston defines it as sales minus cost of sales and selling, general and administrative expenses. Please see press release and MD&A we filed yesterday for further information about this non-GAAP measure.

I would now like to turn the representation 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 management discussion of the results of the second quarter of our financial year 2013. I am joined on the call by Frédéric de Narp, our President of the Luxury Brand division; and Cyrille Baudet, the Group Chief Financial Officer. I've also got a couple of other management people in the room in order to handle questions -- more technical questions when we finish this discussion.

In summary then, this quarter's seen our Luxury Brand business continue to supplement higher value but lower margin high ticket sales with more repeatable transactions, as our marketing efforts in bridal and access jewelry and watches deliver an increased volume of higher margin sales. This has resulted in a significantly improved gross margin in that segment of the company.

We've also recently released the life-of-mine plan for the Diavik Mine, which projects a value of around $1 billion for our 40% interest in the reserve and the resource space. The mine continues to successfully transition to underground mining, with the last of the open pit ore from the 418 open pit being mined in this third quarter. The efforts of the mine then are now focused on cost reduction efficiencies, and these are proving to be already successful early on.

Although retail diamond demand has remained robust, de-stocking in the processing chain for various reasons, which we'll discuss later, has depressed demand and, therefore, prices for rough diamonds. We have, therefore, elected to hold some approximately $65 million worth of stock of selected items. In anticipation of improved pricing later in the year, which is a common feature of the diamond year anyway, the latter part is always stronger than the period right out to the European holidays and as we enter both the Jewish and the Indian holiday seasons.

I'm now going to hand the call over to Cyrille Baudet to explain the financial results in more detail. Cyrille will be followed by Frédéric, who will discuss the Luxury Brand business. I am then going to come back to discuss the Mining segments and close. Over to you, Cyrille.

Cyrille Baudet

Thank you, Bob, and good morning, everyone. Before I begin speaking about our results, I'd like to tell you about 2 announcements that we've recently made. First, we released the updated mine plan indicating an estimated net asset value of more than $1 billion based on reserves and resources, including A-21 for Harry Winston shares of the Diavik Diamond Mine. And second, the Luxury Brand segment refinanced senior secured revolving credit facility by entering into a new secured 5-year credit agreement with the consortium of banks for $260 million.

Now on to the results. Our consolidated sales for the second quarter were $176 million, with $61 million from the Mining segment and $115 million from the Luxury Brand segment. The decision by the company in the second quarter to hold back from sale of the broad range of rough diamond because of market condition plus the fact that the second quarter of the prior year included low margin, high-value transaction that was not repeated in the current year result in the current year, resulted in a decrease of 20% in the headline sales number from the comparable quarter of the prior year at actual recent rates and a decrease of 11% at constant currency rates. Bob will speak to the rough diamond sales results and Frédéric will comment on the Luxury Brand sales results.

However, our consolidated gross margin in Q2 was $72.2 million, which is consistent with the prior year quarter. As a percentage of sale, margin was 40.8%, an increase of 830 basis points. The Mining segment generated sales of $61.5 million with gross margin of $23.9 million, compared to sales of $89.6 million and a gross margin of $24.5 million. The Mining segment sold 0.43 million carats at an average price per carat of $142, compared to 0.57 million carats at an average price per carat of $157. The 24% decrease in volume sold and the 10% decrease in the company's achieved average rough diamond prices impacted this quarter. The Mining segment is holding 0.7 million carats of rough diamond inventory, with an estimated current market value of $90 million at July 31 and -- of which $65 million represents inventory available for sale. The rest being in the process of sorting.

On the Luxury Brand side, gross margin percentage increased by 11.9 points and margin dollars increased by 14.4%. The improved results were driven by a number of factors and they are all the result of planned action as part of our long-term strategy. First, reduced sale discounts and improved product mix with higher sales of bridal, access jewelry and access timepieces, improved wholesale timepieces margin as a result of new product launches, higher production volume which creates operating leverage and the strengthening of our supply chain.

Consolidated SG&A expenses increased 14% to $51.8 million in the second quarter of fiscal 2013 versus $49.1 million in the prior year period. SG&A for the Mining segment decreased $0.5 million in the quarter. In the Luxury Brand segment, SG&A increased by $6.2 million in the second quarter or 40% versus the second quarter of the prior year. The increase was primarily due to higher advertising, selling and run expenses related to the opening of our new salon. We are making strategic investment in the brand and we expect SG&A to continue to grow through fiscal '14 and then plateau as we begin to leverage our SG&A spending. So far, we've made strategic investments in new product development, systems, training and infrastructure, new distribution offices in Hong Kong and Miami and new salons in China. We expect that through this spirit of investment, we will see the brand grow, however, true blending of the investment will be achieved when we begin to leverage spending beginning in fiscal 2015.

Corporate segment SG&A increased $1.1 million to $3.4 million for the quarter, primarily due to travel expenses and salaries and benefits related to additional corporate employees. The resulting consolidated operating profit for the quarter decreased 29% to $16.4 million versus $23.1 million in the second quarter of the prior year. EBITDA decreased by 24% in the quarter to $33.4 million versus $43.8 million. Operating profit and EBITDA for the mining segment decreased 37% to $11.7 million and decreased 31% to $24.9 million, respectively, compared to operating profit of $18.5 million and EBITDA of $36 million in the comparable quarter. The decrease in operating profit was primarily driven by the holding back of rough diamond for sales resulting in the lower rough diamond sales volume and lower average prices in the second quarter.

Operating profit and EBITDA for the Luxury Brand segment increased 16% to $8 million and 10% to $11.7 million, compared to $6.9 million of -- compared to result of $6.9 million and EBITDA of $10 million last year. The increase in operating profit was primarily driven by positive product mix.

Our liquidity is solid with cash on hand of $69 million. We have refinanced the Luxury Brand senior credit facility for 5 years and have $75 million available in our Mining segment credit facility.

Now I would like to hand the call over to Frédéric.

Frederic de Narp

Thank you, Cyrille. So far, the consumer demand for luxury products remains healthy despite the economy weakness in the Eurozone. The tourism from emerging markets continues to be a significant factor supporting demand for the luxury products from durable brands.

I am pleased to report that the long-term strategy we implemented over the past 2 years is working. While we're expanding our distribution in China, that remains the focus of strategy, includes maintaining a diverse global platform by investing in the core markets of the U.S., Japan and Europe, as well as strengthening our presence in North America. Our objectives are to significantly grow sales and profitability by focusing on: strengthening our product assortment within traditional new jewelry and timepieces collection in the access, core and equipment segments; also, the expansion of the retail and wholesale distribution networks in prime locations around the world with a focus in emerging markets, as well as strong considerations of tourism flows; we are supporting the expansion of our distribution network and launching new products with a strong innovative advertising campaign and exciting promotional and sales events to greet our brand awareness in new markets; we're strengthening our infrastructure and supply chain to drive margin improvement; and we continue to produce products that use only the highest quality materials and craftmanship that our brand is known for.

So the sales during the second quarter were $115.4 million, down 13% on a current exchange basis and down 11% on a constant exchange basis. The operating profit increased by 16% to $8 million for the quarter. There were 2 high-value transactions during the current quarter for $19.1 million versus 2 high-value transactions in the prior year second quarter totaling $55.6 million. So excluding the high-value transactions in both quarters, sales increased 25% year-over-year in the second quarter, so we continue to experience strong growth in our access and corporate segments.

Now regionally, our constant exchange rate sets for the second quarter in Japan were up 47%. And in America, sales were up 32%. Both Europe and Asia outside Japan generated the high-value transactions in the prior year period that were not repeated in the current year period with the reserves that Asia outside of Japan was down by 41% and Europe was down by 36%. So excluding high-value transactions in both periods, sales in Asia outside of Japan would have been plus 16%, and in Europe would have been plus 14%. Japan continued its strong performance compared with the prior year, which was impacted by the earthquake and tsunami. America has benefited from strong tourism and improved economy conditions.

Our sales for the first half of the year are up 2% to $218.9 million, and our operating profit is up 36% to $15.2 million versus the comparable period in the prior year. Considering that in the comparable period in the prior year, we had a greater portion of high-value transactions totaling $60.8 million versus the current year high-value transactions totaling $19.1 million, the growth in the access, core and high jewelry product segment is significant. Excluding the high-value transactions from both years, sales in the first half of this year increased by 30%.

Our new salons in Shanghai, China are performing very well. The increase in brand awareness in China also provides benefits to our salons in Europe and America as Chinese tourists purchase pieces abroad. We are very pleased to announce the opening of a new license salon in Moscow in Russia during the month of May and a new directly operated salon in Harrods in London during the month of August.

In terms of our access and core products, we've seen great success during the first half of the year with the launch of the new Belle bridal collection, as well as the branded the logo Harry Winston ring. Timepieces also continue to perform well with a very strong start from our Ocean Sports collection.

We have seen both in bridal and timepieces that unit and dollar volumes of our access and corporate have all increased by double digit during the first half of the year compared with the comparable period of the prior year. But these improvements in product mix are contributing to the strong growth margins we've achieved this year.

Now in terms of outlook. The company expects the trend of wealth creation in emerging markets combined with increasing tourism to remain key drivers of luxury, jewelry and timepieces. Over the long term, consumer loyalty for luxury products is expected to remain strong. The rising consumption in Asia translates into significant growth potential for strong global luxury brands. In the near-term, the impact of the debt crisis in Europe will continue to present challenges, although Harry Winston's exposure to the European consumer is minimal. We expect to open a new salon in Geneva, Switzerland early next year, as well as licensed salon in Kuwait City during the fourth quarter of this year. Our wholesale timepiece distribution network is planned to expand to approximately 220 doors by year end.

So we are very pleased with the results that we achieved in the first half of the year, and we will continue to focus on executing our long-term business plan, driving sales and increasing profitability. The company is well-positioned moving into the second half of the year supported by the strong product assortment, advertising campaign and global distribution network in prime locations. We expect to see continued strong growth in volumes for our bridal and timepieces.

We're now very excited about the upcoming 26th Biennale des Antiquaires in the Grand Palais in Paris beginning September 12, in which we are the only American retailer. We are double the amount of space in the [indiscernible] compared with the previous event. And we will be featuring for the first time our new water collection, product collection of high jewelry, which we expect will be well-received by clients and press alike. 2 years ago, when we participated in the Biennale, we received numerous awards for our Royal Gardens collection. So this collection, including the Ultimate Adornment High Jewelry collection continue to position our brand at the pinnacle of the jewelry market. With innovative designs we are building the uniqueness of the brand and improving our margins.

I would like to pass the call back to Bob.

Robert A. Gannicott

Thanks, Frédéric and Cyrille. So as you just heard from Frédéric, our retail diamond sales have grown substantially despite the nervous financial conditions in the world. Although I'm sure that we've outperformed most of our peers in this regard, I believe that some sales expansion in key markets is being the norm for the industry. So it's therefore, perplexing to experience at the same time a depressed rough market -- rough diamond market. This dichotomy results from stocks of polished diamonds and jewelry being created last year to accommodate a forecast base of growth in China and India that has, in reality, become more subdued this year. This, combined with more stringent credit provision, has led to de-stocking throughout the chain rather than ambitious replenishment. We expect the latter part of the year to deliver renewed rough diamond demand as the year end gift giving season approaches and people start looking to building stocks again following both the Indian and the Jewish holiday periods.

In the meantime, we're very comfortable holding stocks in items where we feel that the rough and the polished pricing are mismatched. At our last sale, we did, in fact, sell our complete diamond production in terms of its dollar value, although we sold some items out-of-stock and replaced other items that were more difficult to sell this much back into the stock. So it is very much a live stock process.

The Diavik Mine continues to increase its underground production performance from both of the 154 kimberlite pipes, A-154 South and A-154 North. As the mining has progressed, the levels well below the bottom of the now closed open pit, the ground conditions have been improved, allowing easier access to broken ore. The A-418 open pit is now in its last weeks of production and underground develop below the pit bottom has been prepared for the beginning of our underground production there. The heavy blast patterns that are used in the open pit inevitably disturb the rough immediately under the pit floor, making the upper level of underground mining somewhat challenging. But the stock pile of open pit ore is being created to supplement underground production shortfalls from the early 418 production underground.

The production target for the year remains at around 8 million carats, with approximately 1 million of these being delivered from reprocessing of coarse process plant rejects from the early years of mining. This material, of course, delivers a much finer size distribution of diamonds, which are therefore lower-priced. If the opportunity arises, the process more of the higher valued production ore at the expense of the reprocessing material, then the mine may deliver less carats but higher value.

The funds to complete the feasibility study for the A-21 open pit, the last of the open pits and, in fact, the last of the Diavik ore bodies that we developed, these funds are being committed at the first phase of the step-wise development process. The next step would then be the crushing of the rough products required to construct the dike that will surround the A-21 open pit, using a crushing plant that's already on-site and, in fact, being used to supply raw fill for the underground mining operation. The recognition of additional resources in the A-154 and A-418 kimberlite pipes as a result of the recently completed drilling program has reduced the urgency for the A-21 development somewhat. Cost reduction has become a focus now that underground mining has become more of a routine. A four turbine wind farm is in the commissioning stages of being able to provide 10% or more of the electrical power requirement for the operation for example.

Fortunately, the retail uptake of diamonds in Europe at about 10% of the world market was never competitive with America and Japan, and more recently, China and India. But the almost complete loss of customers there combined with the slowdown in China and India has depressed general industry conditions and optimism. Luxury brands like Harry Winston have generally outperformed the broader market as customers favored trusted suppliers with clear marketplace recognition.

Our own rough diamond prices have only actually fallen by 11% since our first sale of the year, and this contrasts for instance with the iron ore pricing which, I believe, has fallen 24% in the last month alone. So this is not really a precipitous fall, 10% -- 11% since the beginning of the year after enjoying a spectacular appreciation the year before. The medium-term outlook continues to see retail demand exceeding mine supply on a global basis with the timing of the realization of this effect being dependent on global economic conditions, of course.

In closing then, after more than 15 years of continuous service as an Independent Director of the company, Mr. Roger Phillimore has retired from the Board of Directors to focus on other professional challenges in his life. Roger has been a close friend and a sounding board to me particularly throughout the evolution and growth of the company, while also being a wise and collegial member of the Board of Directors. We all wish him well for the future.

And finally, it is with deep regret that we note the recent death of John Lamacraft. John served as the Chairman of Harry Winston as we dealt with the financing required for the initial mining capital program. We extend our sympathies to his family.

Thanks for listening to us all, and now we're ready for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And the first question we have is from Irene Nattel from RBC Capital Markets.

Irene Nattel - RBC Capital Markets, LLC, Research Division

A couple of questions, if I might. I guess standing here and looking at the situation from 35,000 feet, obviously, since the world first went pear shaped 4 years ago, it seems like we've had 4 years in a row of kind of fits and starts in rough diamond pricing. And recognizing that from a longer-term prospective, pricing is still firm, but yet still when you see 14% erosion quarter-to-quarter, it does give one pause for thought. So I guess from where I sit, Bob, Harry Winston is in a relatively luxurious position because you have a clean balance sheet, and so you can afford to hold back inventory. But the prospect of making a significant acquisition at this point and adding a lot of leverage to the balance sheet, against this kind of a backdrop, I'm wondering how you and how the board is thinking about that at this point in time?

Robert A. Gannicott

Well, thanks for the question, Irene, but we don't comment on the board discussions on the call at this time. But we don't comment and we certainly plan to have the -- we plan to have the rough diamond inventory sold by the end of the year anyway. This is just really holding inventory in a period where the holiday season layers on top of a lack of aggressive demand anyway.

Irene Nattel - RBC Capital Markets, LLC, Research Division

Yes, I know. I certainly understand that, Bob. I guess I was trying to get at was more what your views globally are at this point in time on adding leverage to your balance sheet.

Robert A. Gannicott

Well, we're cautious about it. I think there is room for some more leverage, but I don't think -- certainly don't want to get overexposed here.

Irene Nattel - RBC Capital Markets, LLC, Research Division

And then, if I could, just moving on to Luxury Brand segments. Certainly the 40% increase in transaction count is very impressive. I'm wondering how much of that is for the wholesale channel and how much of that is direct to consumers?

Frederic de Narp

Most of it is direct to consumers. It's really the retail salons, the 24 retail salons we currently run registered the most important growth. It is true for bridal, it is true for ultimately all collections, including watches. But it's mainly partners in all this is a very minor part of our business, very minor, mainly retail.

Irene Nattel - RBC Capital Markets, LLC, Research Division

That's very helpful, Frédéric. And just following up on that, could you give us a view at this point in time of how -- of what the customer profile looks like, given the significant increase in transaction count, who the incremental customers are and how, I guess, your perspective of the customer mix or what your perspective on how the customer mix may have evolved over the last 3 years as you've really lessened dependence on those very significant transactions?

Frederic de Narp

Yes. So first, for the first significant transactions. We have the King of Diamonds and the Jeweler to the Stars, and this positioning is something that we hold very, very high. And, for example, the V&A acquisition where we have a location 2.5x the size of the one we used to have 2 years ago and we will be [indiscernible] Biennale des Antiquaires next week, so it tells you a lot about what is the position of the brand in the world of high jewelries to start with. Now to profile our plan, we've extended a new each reach and we are reaching new audiences in 20 -- in less than 2.5 years, we've increased -- we doubled the number of jewelry produced and sold basically. So with that, it means more awareness of 2 elements, I think that's generating more traffic to the brand is the less intimidation, less intimidating facade and concept stores. You could see in Harrods we've just opened and much more welcoming, very luxurious but much more welcoming [indiscernible] Shanghai, so the concept store is working and generating additional traffic and keeping the privacy inside so that you can have big privacy for the very important clients on one side. On the other side, the campaign stay where they are that we launched 2.5 years ago that find to be very successful with really less intimidating factor. The third element and last element, which is growing premium at the time we spend the bridal is growing month after month, year after year in every single region, including, of course, Japan, where we're very, very predominately bridal, but the bridal segment is -- has limit -- has no limit in what we can achieve there and is a big part of what we do in jewelry.

Operator

The next question comes from Oliver Chen from Harry Winston.

Oliver Chen - Citigroup Inc, Research Division

It's Oliver from Citigroup. Regarding the hold back of inventory, what gives to the conviction that you will have an ability to sell through these? It sounds -- seems like the macroeconomic landscape continues to be cautious. What quarter should we model these happening? And should we expect the non-recurring benefit from the $65 million as well as the sell-through on the diamonds that you obtained in that quarter?

Robert A. Gannicott

Yes. Okay. Well, what makes us think that we're -- we can sell it today through what other producers are selling everything today. It's a question of price. We simply believe there's a higher price to be had in the latter part of the year when the -- all of the Indian factories get back to work after Diwali, and also after our significant polished diamond show which is held in Hong Kong every year in the latter part of September. So this is -- Oliver, this is a sort of commercial decision just made within the context of sales in the year. We would expect to sell these -- the bulk of these probably in the last quarter.

Oliver Chen - Citigroup Inc, Research Division

And given the volatility that we're seeing in the market and your strategic position, what's your take on how these may impact the M&A availability of other mining assets?

Robert A. Gannicott

I don't know that it affects them very much at all. The only ones -- the only -- I mean, we just noted -- you would have noted that a very small producer in Canada decided to shut down because obviously, their sales revenue wasn't matching their production expenses. But the kind of things that fall victim to very, very minor price falls like this are not the kind of thing that we want to buy anyway. The other ones that are more robust are certainly of interest, but they'll just remain to be of interest. To put it in context, it's not compared to the price changes and other commodities. Diamonds are actually being stable for -- relatively stable for a very good reason, which is the actual retail sales of the finished product are actually going quite well for everybody.

Oliver Chen - Citigroup Inc, Research Division

And our final question, congratulations on such strong Luxury segment momentum on both the sales and margins side. Could you let us know what the inventory on a year-over-year basis is looking like at that division? And how do you feel about inventories relative to sales trends and the current state of your inventories at Luxury?

Frederic de Narp

As you know, we've made comments on the fact that when -- 2 years ago, we had an inventory level that was above the average inventory level defined in the industry. We are progressing on merging our inventory differently. Of course, we have built up some inventory to support the new collections and to support the opening of new stores like Harrods last month and like Geneva in the coming quarters. But overall, the quality of inventory is going in the right direction and the efficiency, if you will, our working capital going to the right direction.

Oliver Chen - Citigroup Inc, Research Division

Okay. And just a follow-up to Luxury, the SG&A leverage, I did expect more leverage a little bit sooner. What gives you the conviction to spend now on the SG&A side in Luxury? It feels like it's you made a decision recently to do that, am I correct?

Frederic de Narp

Yes, the -- I mean, if you want to understand, our SG&A is basically made up of several parts. One is what happens in the fall of the boutique and when you open -- patiently, when you open the Peninsula in Shanghai, when you open Harrods, you expect SG&A to grow in line. And of course, when these stores reach maturity, we're going to get leveraged on these as SG&A. The second aspect of our SG&A because we are retail is horrible expenses, and these horrible expenses they grow in line with sales and they grow in line with the type of sale that we are pushing. These expenses could be credit card fees, part of our rent, sales commissions and you expect that to adapt.. The last bit of SG&A on which we've invested a lot over the last 2 years is basically the health dysfunctions and distributable function that allowed to transform in what we sell and how we sell it. You don't need to send team in New York to sell high jewelry as you need to sell bridal, and that's where we've invented and we continue to invest in the year and that's the part of our SG&A that we believe is going to plateau at the end of FY '16, if you want. And that's where the leverage is going to come from.

Operator

The next question comes from the line of Brian MacArthur from UBS.

Brian MacArthur - UBS Investment Bank, Research Division

I just want to come back to the inventory again and the statement about the estimated acheived price for approximately $104 a carat if we sold all the last production. That basically mean that, obviously, this quarter improved mostly out of 418, but if you make the adjustment for the price, most of it is A-418 B material, or is there something else going on there? What exactly is that?

Robert A. Gannicott

Jim, if you please, I've got Jim Pounds in the room, Brian. Have you got more detailed comment on that, that I would likely give?

James R. W. Pounds

Yes, I think that what we've just recently sold did have a significant proportion, a very large proportion of 418 goods within the sales mix, and we also saw some of the first round of the RPR goods coming through the system. So those, as Bob pointed, somewhat cheaper good and smaller goods, which depressed the average price of that.

Robert A. Gannicott

Can I just also say there, it's getting slightly technical. I'd be happy to discuss it with you at more length, Brian, but there is -- A-418 B in particular is both fine-grained and has a high heavy mineral content. It therefore passes quite an unusually large amount of heavy minerals into the recovery system and basically, swamps recovery to some extent. So periodically, they simply have to kind of run extra hours on the recovery just doing fine diamonds. And when that happens, you've got a burst of fine diamonds come through in the next sales mix as it flows on through the process.

Brian MacArthur - UBS Investment Bank, Research Division

Okay. But for this quarter, you've got $147, and obviously that's a mix of all the pipes and was some high material from last quarter. But now you're saying what's left is the $104 stuff, which is in that $65 million, I assume, of inventory. That still seems to be really weighted to the low value stuff. Is that fair or not?

Robert A. Gannicott

Jim?

James R. W. Pounds

I would say that the -- it's the $65 million that we held back at the end of the last quarter was probably more weighted to the better end goods, and so it wouldn't be represented by the run off mine production that we sold at the recent sale. So in other words, it certainly wouldn't be around that lower figure.

Robert A. Gannicott

I also wanted by the way -- just another comment, and I just noted from this on the previous call, there is a sort of implication that anything we're holding back is because we just can't sell it or something. You've got to remember that we have a view of the price of polished diamonds as well. So it's more a question if we're seeing a mismatch between the price that we have to pay for polished item versus the price the corresponding rough item, it makes sense to stock it because that is bound -- that's bound to come back once the market. So the -- I mean, the market is adjusting itself all the time. You should know the rough to polished diamond market is a very complex place. So it's a flat kind of decision-making rather than because you just can't sell. These things are all a matter of price.

Operator

The next question comes from Des Kilalea from RBC.

Des Kilalea - RBC Capital Markets, LLC, Research Division

Could I just ask a few questions on production? There's an 8 million carats target for diamond for the whole year on a 100% basis, just what, if any, kind of hurdles could there be to getting there? And then looking at the targets for the RPRs of 1 million, is that -- does that look kind of doable? And then maybe just looking at the way the profile of mining changes from -- once you're out of 418 pit into underground, will you be getting much more from the 154s as opposed to 418? And then just finally, tax on the Mining business, what should we be modeling?

Robert A. Gannicott

That's certainly -- trying to answer the last one, Des. The other ones are more my thing definitely. As you know, over the history of this, being one of the issues is we've got forecast of this for the year because that's the only kind of thing that really [indiscernible] we're in, are interested in. So I guess divided into 10 diamond monthly aliquots and we sort of have this quarterly forecasts or just quarters of the whole year, and it's not realistic because the winter months are always tougher to produce than the months that we're in now. And of course, that -- there's a gap between when the production's easy as to when we're actually getting that material for sale. So the summary of that is the production is always back end loaded in the year. So the fact that we're -- the fact that we haven't produced half of 8 million carats despite the fact that we're reporting half of the year isn't really terribly rather. I just -- I talked to David yesterday, we had a joint venture meeting on Monday but they're well on plan to actually produce 4 million tons out of the underground mine and, of course, getting 1 million tons out of the open pit is a lot easier than, in fact probably almost target done already put stock up. So actually, getting the diamond in production out of all of that is slightly more of a challenge because of the processing rate for the A-418 B ore. Were we effectively are running about 6,000 tons per day through the processing plant as opposed to a targeted 7,000 tons a day when we're running that material. So the delivery again of the year will be focused on delivering value, so that we can put more material from the 154 South pipes, particularly 154 South but also 154 North, to get more of that material through the processing plant at the expense of not doing some of that job, particularly the RPR, the reprocessed material, then obviously that's a good economic decision that we will be made, which is why I wouldn't become completely focused on 8 million carats. And somewhere between 7.8 and 8.2, I think is a more reasonable way to look at it, but the idea is to maximize the value that comes in. So did that answer everything except for tax? Anybody here have some tax? No. Cyrille? No. We'll get back to you on the tax, Des.

Des Kilalea - RBC Capital Markets, LLC, Research Division

Yes. And then, Bob, just a quick one. The diamond fund, any update on that?

Robert A. Gannicott

Yes. Well, I don't know that we can say much about it. I just grab myself by the throat there. But yes, I think it's -- as you can imagine, selling anything of that type is not being easy for the people are doing. It is not being done by. We're not people that are selling the fund. Of course, it is being done by the independent group based in Switzerland. But I understand from them from our recent call that they do expect the lead order to appear I think in early October.

Operator

[Operator Instructions] The next question comes from the line of Edward Sterck from BMO.

Edward Sterck - BMO Capital Markets Canada

I just got 2 questions for the day. The first is actually a tax question and following up to Des' question. At the group level, what's the expected tax rate going forward? Just looking at what's been achieved over the last several, I guess, the last several years, of course, it's been pretty variable historically and at times it's been pretty high implied tax rate. Should we just be looking at the standard rates of Canadian corporate income tax going forward, or where would you picture it?

Robert A. Gannicott

We'll have to come back to you on that one. You want to pretty detailed answer from that, I think.

Laura Kiernan

This is Laura. I just wanted to make a quick comment. From a cash flow perspective, we did put into the mine plan about a 39.5% tax rate. That's not what you're going to see on the income statement because there are various things that affect our deferred tax assets and liabilities, like foreign exchange, that cause a swing in that tax rate. So unfortunately, I don't know that we'll be able to give you good guidance on a forward tax rate because of the changes in the deferred liabilities.

Edward Sterck - BMO Capital Markets Canada

Okay, that's fair enough. And then going on to my second question, which is just on the diamond sales and reading what was in the MD&A for the current quarter, my interpretation is that some of the higher valued diamonds that were held back from sale in the first quarter or perhaps in the fourth quarter of last year were sold during the second quarter of this year. And I'm just curious as to how successful that was as a strategy, whether higher prices were achieved in Q2 for those higher value goods that was anticipated would be achieved in the previous quarters?

Robert A. Gannicott

Jim, do you want to answer that?

James R. W. Pounds

I think where we saw the level of demand, Ed, was coming mainly in the larger goods and relatively, more expensive goods was from the U.S. market. So we sold through, of course, the better goods to our regular customer, Tiffany, which we always do. But where we saw the improvement in demand was not in the next level but on the third level down of our better end goods, where we were able to certainly maintain the price, where we did see a bit of a slippage coming out of the second quarter. So certainly, we were pleased with the price that we received on that range, and we have still been selling those goods now at the end -- during our August sale last week.

Edward Sterck - BMO Capital Markets Canada

So overall, would you say that the strategies a bit worked as intended?

James R. W. Pounds

The strategy has worked in as much as we weren't selling into an extremely depressed market where -- which at the time just before the August holiday, it was difficult to move those goods. So by holding on to those, we've maintained the price level that certainly kept us...

Robert A. Gannicott

Yes, I mean, we certainly sold them at a price that we weren't able to sell from that earlier.

James R. W. Pounds

Completely right, yes.

Operator

And I would like to turn the call back over to Mr. Robert Gannicott. Thank you.

Robert A. Gannicott

All right. Well, just thank you all for joining us and looking forward to the next quarter. Thank you.

Operator

Thank you for joining today's conference. This concludes the presentation. You may now disconnect, and good day.

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

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

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

Source: Harry Winston Diamond Management Discusses Q2 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts