Harry Winston Diamond Corporation F2Q09 (Qtr End 07/31/08) Earnings Call Transcript

| About: Dominion Diamond (DDC)

Harry Winston Diamond Corporation (HWD) Q2 2009 Earnings Call September 10, 2008 10:00 AM ET

Executives

Robert Gannicott – CEO

Alan Mayne – VP & CFO

Thomas O’Neill - President

Analysts

Irene Nattel - RBC Capital Markets

Analyst – Griffin Equity Research

Aaron Freidman – Accountability Research

John Hughes – Desjardins Securities

Jacques Wortman – Griffiths McBurney & Partners

Matthew O'Keefe - Thomas Weisel Partners Canada

Patrick Morton - RBC Capital Markets

Analyst - National Bank Financial

Operator

Good day ladies and gentlemen and welcome to Harry Winston Diamond Corporation fiscal year 2009 second quarter conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, your Chairman and CEO, Mr. Robert Gannicott; please go ahead sir.

Robert Gannicott

Good morning ladies and gentlemen, thanks for joining the Harry Winston quarterly earnings call. Please note that we’ll be making some forward-looking comments today. Various factors and assumptions were applied in deriving these comments and actual results could differ materially. 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.

While we were of course pleased with our performance during the last quarter and half year presented to you here today, the international cache of the Harry Winston brand has proven its strength despite difficult trading conditions in both the US and Japanese markets.

This broader diamond marketplace has also delivered strong pricing for our rough diamond sales as the expanded international demand meets the reality of some declines in global production. This price increase has substantially mitigated lower then anticipated production from the Diavik Mine as we work through the transition from one open pit to the next and the uncertainty of production forecasting that this inevitably entails.

We’re also pleased that the Rio Tinto, the operator of the Diavik Mine has successfully advanced the construction program to develop the new underground mine within schedule and cost budgets through a time when many resource projects have experienced severe cost [overruns]. This capital program secures both additional lifetime and operational security.

I’m now going to hand the call over to Alan Mayne, our Chief Financial Officer, to discuss the financial results. He is then going to be followed by Thomas O’Neill, President responsible for the retail division and I’m then going to return to discuss the mining and rough diamond sales segment.

Alan Mayne

Thank you Robert and good morning. These results represent significant achievements in the face of a challenging production environment at Diavik Mine and a weakening global economy; we recorded a 7% increase in consolidated sales, a 23% increase in consolidated gross margin and a 30% increase in consolidated earnings from operation.

Our foreign currency exposure has a material influence on our reported net earnings. During the second quarter ended July 31, 2008, the Canadian dollar weakened against the US dollar. This resulted in a net $5.3 million foreign exchange gain in the quarter compared to a net $11.8 million foreign exchange loss in the same period last year.

Taking into account this foreign exchange gain our interest expenses, other income and income tax expense we reported net earnings of $49.9 million or $0.81 per share compared to $20.1 million or $0.34 per share in the second quarter last year.

In the second quarter cash flow from operations increased 55% to $46.2 million however our investment in capital assets increased to $67.7 million from $48.3 million in the comparable period of the prior year. This increase primarily reflects the capital costs associated with the underground mine development at Diavik Mine and the continued stripping of the A-418 pipe.

Net debt excluding restricted cash balances as at July 31, 2008 was $281.9 million compared with $294.6 million as at January 31, 2008.

Now let me spend a few minutes on the financial review of our mining and retail segments. As highlighted in our results released yesterday, our share of production from Diavik Mine was down 23% in the second calendar quarter. However, higher rough diamond prices mitigated this decrease with the result that sales were essentially unchanged at $105 million.

Notwithstanding plant sales, the mining segment recorded a 27% increase in earnings from operations. This increase resulted primarily from a reduction in cost of sales as a great proportion of costs in the quarter was attributable to development activity versus production activity.

In addition cost of sales were reduced by a $4.3 million insurance settlement relating to an excavator fire that occurred in the fourth quarter of fiscal 2006 at Diavik Mine.

The retail segment recorded an impressive 19% increase in sales in the quarter. The gross margin rate excluding the impact of sales of pre-acquisition inventory was flat at approximately 51%. The ratio of SG&A expenses to sales decreased to 42% from 43% in the comparable period last year.

Most importantly the retail segment generated earnings from operations of $5.9 million in the second quarter compared to $3.3 million last year. Now let me turn the presentation over to Thomas to discuss the retail business in more detail.

Thomas O’Neill

Thank you Alan; good morning. Our retail segment finished with a strong second quarter. It is self-financed with no draw on the corporation for either cash contributions for its ongoing business or for our expansion plans. And with the second quarter results we have finished out the first half of the year with a significant sales increase over the same period last year.

In the second quarter we have continued to grow our retail business into a larger and broader platform both in product and price point as well as geographic reach. In doing so, we have been able to blunt the impact of the economic situation in the US markets and affectively offset the economic softness in Japan.

The strength of our new businesses in Asia and our growing businesses in Europe and The Middle East contributed to our positive results. Our customer base continues to grow outside of our traditional US market as a percentage to the total.

In the first half of the year compared to the same period last year, our US clients comprised 26% of the total this year versus 30% last year, while Asia outside of Japan, grew to 17% from 14% the previous year and Russia to 15% from 10%.

Japanese customers have remained at 30% of our total retail store sales for both this year and last year. The comparisons for the rest of the world varied little from the previous year. The US remains the largest diamond consuming market in the world and while we are determined to expand outside the US particularly in Asia, we are also committed to opportunities in the US on a selective basis.

There remain pockets of strong business for us in the US and this is behind the opening of our eighth US salon early last month in Costa Mesa, which is in Orange County, California. Our wholesale watch business is robust and our newly launched wholesale jewelry business is off to a solid start in Russia.

We are also eager to explore the internet sales opportunity. On the product side in the second quarter we have seen strong results in price points greater then $500,000 represented by unique, one-of-a-kind jewelry items where gross margins tend to be more modest then lower price points.

In the first half of the year we introduced 32 new jewelry products. These included repeatable designs as well as one-of-a-kind pieces. We have crafted a print campaign including a new catalogue with the New York [centric] team to accentuate the new designs and it will hit the fashion and lifestyle magazines shortly.

The second quarter and the first half of the year have been strong for our retail segment. Our businesses in the US and Japan continue to face challenges and we see the rest of our businesses in Europe, Asia and The Middle East on a relatively strong footing as we start into the second half of the year.

So now let me turn it back over to Robert.

Robert Gannicott

Thanks Thomas and Alan and referring to the mining segment then, this is the year that mining in the first open pit winds down as we begin the transition to both the next open pit and underground production.

This is meant to clean up the open pit portion of the A-154 North orebody residing in the wall of the A-154 pit as well as taking the lower [lifts] of the A-154 South orebody under the constricted conditions that exist now at the pit bottom.

The local decline in grade in the A-154 South pipe has also exacerbated the more complex operating conditions leading to a production shortfall and some uncertainty in short-term production forecasting. It has though provided an early opportunity to begin extraction of the upper benches of the newly exposed A-418 ore body allowing the low grade kimberlite ore mixed with barren lake-bottom sediments to be removed to expose clean ore going forward.

Fortunately diamond prices for our production have risen by more than 30% over the last 18 months and this has gone a long way to mitigating the diamond production shortfall during this transition period.

The capital program to develop the underground mine that delivers both operational security and longevity to the project is well advanced and within time and cost parameters, during a period when this is something of an exception in global resource developments.

The capital program includes the installation of a specialized small diamond recovery circuit to capture the benefit of price increases in small diamonds that’s being driven by the expanded demand from the global watch industry.

The increases in commodity prices generally as well as Western Canadian labor rates have put added pressure on operating costs in the mining industry generally. I believe this is comfortably exceeded by the increase in price of our own commodity, diamonds, where the superior market knowledge from our combination with polished diamond purchases for our jewelry and watch divisions, allowed us to respond quickly and effectively to increased market demand.

Looking forward the balance of the year at the mine is expected to see production from the remaining portion of the open pit of the 154 South orebody, preparation of the A-418 open pit and the continuation of the capital program. More then 10 km of underground development [headings] have already been completed to secure access to the lower parts of these rich orebodies and surface installations in support of underground mining are well on their way to successful completion.

The diamond market continues to see new demand from the BRIC economies, Brazil, Russia, India and China, more then compensating for the weakness felt in both America and Japan. As the US dollar strengthens its reasonable to expect some slowing in the pace of price increases although global production declines led by Southern Africa in particular, suggest strong pricing for the future.

Well thanks for listening to the formal part of this and we are now happy to respond to your questions.

Question-and-Answer Session

Operator

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

Irene Nattel - RBC Capital Markets

On the end demand for the product, you mentioned that you saw the strongest performance in the above $500,000 segment but can you give us any other color on what you’re seeing in terms of demand both at price point, product type and by region?

Thomas O’Neill

By price point, as I mentioned we saw a nice bump in the business above $500,000, the rest is kind of scattered across the different clusters. In terms of merchandise we continue to see the ring business is quite strong for us.

Irene Nattel - RBC Capital Markets

In terms of regional demand, again, one of the things that’s interesting is you have a highly mobile customer base as you’ve noted many time, can you talk a bit about what you’re seeing in terms of, you said the BRIC doing very well but in terms of private sales where are those orders going into and sort of the nature there?

Thomas O’Neill

I think in my comments, the customer base—we track our customers two ways, where we consummate the sale which really doesn’t tell us very much other then somebody walked into the store and bought in that store. What’s more important for us and we’re a company that does this and we share it with the public, we track very carefully who the customers are—what passport they’re holding. And for us this is almost more important in many ways then where they are buying.

So as I had mentioned our US customers, our US passport holders, buying in the world, last year for the same period were about 30% of our business. This year they went down to 26% and correspondingly there was a very large jump in our business from Asian customers who are Asian passport holders from 14% last year to 17% for example and then Russia which is an important segment for us and any luxury goods business in the world these days, it jumped from 10% last year to 15% this year.

And again where I said Japan pretty much stayed flat at about 30%. So that gives you an idea of where the strength is by economies and where the purchasing power is.

Irene Nattel - RBC Capital Markets

If I take that and I marry it with the result as reported, is it safe to conclude therefore for example that significant portion of the Russian passport holding buyers are purchasing in New York for example because of course you have very good strength in your US reported business and so I guess what I’m really trying to get at is, is that where for example, the Russian customer or the Asian customer is buying?

Thomas O’Neill

Without parsing it too thinly, I’d say that probably two or three years ago, our Russian customer base was buying in one or two places but over the past three years they’ve become even more, travelling even more so it’s pretty much spread throughout principally throughout Europe and throughout the US obviously with the less in Asia and Japan.

But I’d say it’s principally concentrated in North America and in Europe.

Irene Nattel - RBC Capital Markets

Is there any possibility that we can get more color on the proportion of costs at the mine that we’re capitalized versus expense in the period?

Alan Mayne

In the quarter it was about $13.4 million, year-to-date $23.4 million.

Operator

Your next question comes from the line of Analyst – Griffin Equity Research

Analyst – Griffin Equity Research

I’m curious if there’s any integration between the diamonds produced at Diavik Mine with the diamonds sold at Harry Winston, is there any synergies being created between the two companies? Are you capturing any of the benefits?

Robert Gannicott

Yes, it’s the biggest thing that informs our rough diamond pricing, the prices that Harry Winston pays for polished diamonds are what informs our ability to price the important parts of our rough diamond production accurately against the market, particularly important in a rising market where we are able to respond much quicker then other producers.

Analyst – Griffin Equity Research

So the basic benefit is the understanding of the retail market informing to help you sell the rough product, that’s the only real synergy there?

Robert Gannicott

Yes, but it’s quite a big synergy actually.

Analyst – Griffin Equity Research

I’m looking at the market capital growth of the company around $1 billion, does it make—and there’s significant growth on the retail side, does it make any sense to focus the company on the Harry Winston and capitalize on the benefit of the diamond mine and selling it back to [RTZ] and using that money to reduce debt operations and really grow the brand globally?

Robert Gannicott

Well there are various strategies that we could follow. We are alert to—we would really like to expand our rough diamond sales. We think we’ve got a very effective rough diamond sales platform and it would be a big win for us if we were able to put more rough diamond sales through it and therefore capture that same win on other diamond productions.

That’s one sort of strategy we can follow. We are certainly alert to the ability to expand Harry Winston as a retail jewelry brand and we think we’re doing that almost at the sort of—we go from five stores and a new watch factory last year, don’t forget. We’re doing that quite rapidly anyway. But we’re certainly alert to opportunities on both sides but one has to be conscious of the fact that if these businesses are separated then the ability to sell rough diamonds better then other people do goes away with it.

Analyst – Griffin Equity Research

But the company I think has a real value in its Harry Winston diamond side, and you must agree with that because you’re expanding that aggressively but it has almost a schizophrenic nature of the company because how do you value a company that’s 60% diamond production, 40% retail or maybe 70%/30%? Does it make sense in the market and perhaps may reflect better on your price because we have seen a tremendous price drop in the stock that if the two entities were actually separate--

Robert Gannicott


We’ve seen a tremendous price drop in all stocks. It was certainly, the company traded quite well as a combined company at a time when the market was kinder. I don’t think we should panic into some mood to separate these things at this present time. We don’t have any plans to do that. There may come a time when these businesses are big enough individually to stand on their own with perhaps some linkage between them on diamond sales and purchases.

Analyst – Griffin Equity Research

On the Diavik Mine you spent about $113 million over the last two quarters, the budget was $320 million over three years--

Alan Mayne

No the budget is $340 million over five years, $221 million of that is for the underground development. Of that about $138 million will be spent in fiscal 2009 with the balance in fiscal 2010 and of the $138 million we’ve spent about $90 million year-to-date.

Analyst – Griffin Equity Research

And the company was able to finance that from its current credit lines?

Robert Gannicott

Well we—looking at some alternatives now as to—we’ve yet to receive the actual refined budget from Rio Tinto for the next year so once we’ve got that we’ll take a look at whether we can get by as we are or whether we need to do something else to supplement it.

Alan Mayne

But we’ve been financing it out of operating cash flow.

Operator

Your next question comes from the line of Aaron Freidman – Accountability Research

Aaron Freidman – Accountability Research

On the retail side, I just wanted to know what kind of impact if any are you seeing from DeBoer’s Diamond Jewelers, the joint venture that those guys have with Louis Vuitton, are you seeing any, some competition in particular cities that you share and if you can add some color on that side of the business?

Thomas O’Neill

Not really actually, the jewelry, particularly the diamond jewelry retail business worldwide operates at different levels and segments and certainly our segment is at the very top. I think the other brands that are worldwide based are further down on the price point scale.

Aaron Freidman – Accountability Research

So the offerings that the DeBoer’s Diamond Jewelers store is offering is of a lower scale then Harry Winston?

Thomas O’Neill

I can only talk to you about what we offer.

Operator

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

John Hughes – Desjardins Securities

The margins, the 69.2% gross margin on the mine front and the—you’ve highlighted the $13 million, $14 million that shifts out of off the P&L and onto a true capital expenditure, for Q3 the margin again I think you’re expecting to [bite] sales in the quarter, are we going to see a materially different contribution to revenue or bottom line by the mine side in Q3 versus Q2? Is there any grade driven or tonnage driven or cost driven items?

Robert Gannicott

To answer that really, as you know we ran into a short range grade problem in the A-154 South orebody actually before the beginning of this year, and so the material that we’ve been mining is below the reserve grade for this part of the pipe. What we’re forecasting to be conservative is that we go forward with that grade. However I would say that there is the opportunity for—there is an upside opportunity in grade here, but there’s also—I don’t think there’s further downside risk to grade but we are kind of digging at the very lower lifts of the 154 South pipe, at the very bottom of the funnel as it were in this open pit and so there are always the potential for temporary production issues and so on.

To summarize that I’d say there’s probably a potential for some upside on grade but there’s a potential for some downside on production difficulties because that’s life at the bottom of an open pit when we switch over to—in the course of switching over to 418 and so on.

Alan Mayne

From a technical accounting perspective you may see different gross margins in the mining segment depending on the contribution to production from A-418. Obviously we’ve got the cash costs as well as depreciation in there which is driven off units of production so from a purely accounting perspective not a net cash perspective that margin may change depending on the contribution to total production in the quarter from A-418.

Robert Gannicott

The plan for the rest of the year as it stands at the moment is to mine nothing but A-154 South. However if there is a production issue in A-154 South of the type that I talked about then there will be some ore not from the top of A-418 but through the plant.

John Hughes – Desjardins Securities

And you know that the refined budget is yet to be available in terms of the fiscal 2010 period, in terms of the budget that is available, could you give us any guidance for production next year versus what you’re reiterating for--?

Robert Gannicott

At the moment I can’t because actually we don’t have anything available yet. I’m leaving here to go to a meeting in London where I can get a view of it over the next few days but even that is only a very preliminary thing and it’s not properly baked at that point.

John Hughes – Desjardins Securities

On the retail side with the pre-acquisition inventory is there—and seeing the realized margins move up from the 47%, 48% on a gross margin basis up to 50%, 51% is that an end of year type of event or is it next year or—just the flush through of the--

Alan Mayne

The step-up inventory goes through really depending on the mix of product sold, goes out to really 2011 but it really starts to decline materially next year. So this year over the course of the year its about $5.3 million and again, depending on the mix and what sold in which quarter, but then going into fiscal 2010 it drops to about $1.4 million and then its really deminimus thereafter.

Operator

Your next question comes from the line of Jacques Wortman – Griffiths McBurney & Partners

Jacques Wortman – Griffiths McBurney & Partners

Q2 represented the best earnings from operations result from the retail segment, looking at revenue distribution you could probably argue some seasonality in sales, maybe that’s just a coincidence but do you believe the retail segment has turned a corner with respect to sustained profitability?

Thomas O’Neill

I think we’ve built out a number of stores since we acquired the company and we’re starting to see the pay off from that. Certainly we’re very careful about where we expand. Last year as you know we opened five new locations. We had committed on a basis of going forward at three so this year we’ve cut back a bit to average out still at three and I think we’re seeing the results of that.

It gives us a little breathing space as well operationally but certainly we’re very satisfied with the results the first two quarters of this year and we look forward to business going forward.

Jacques Wortman – Griffiths McBurney & Partners

Do you feel that the better results that you’re showing here in Q2 maybe is part of that strategy to focus on fewer stores? Have you been able to focus and really sort of knuckle down on costs and maybe cut SG&A where possible because as a percentage of revenue it was much more attractive in the second quarter then in the past?

Thomas O’Neill

Yes, certainly the costs are under control both on an ongoing basis and those related to new store development and new store openings. So yes, I think the answer is yes.

Operator

Your next question comes from the line of Matthew O'Keefe - Thomas Weisel Partners Canada

Matthew O'Keefe - Thomas Weisel Partners Canada

I thought I heard you say on the retail side that you’ll be exploring internet sales, was that correct?

Thomas O’Neill

Yes.

Matthew O'Keefe - Thomas Weisel Partners Canada

And so how would that work? I thought part of the retail strategy was the experience at the salon and a lot of the customization—would you be doing this to support your existing product line or would you actually come up with like a Harry Winston [light] to go against some of the other internet--?

Thomas O’Neill

No this would be from the existing product line. It would be simply a way for customers who are not near one of our locations to be able to still access the product. It would be something that we’d test probably some time in the next six months or so and we’d probably basically only test it in the US and see how it goes.

Matthew O'Keefe - Thomas Weisel Partners Canada

On the production side, you did mention also that you were always looking at the potential to increase production from—to add to on the diamond production side, short of additional discoveries at Diavik Mine and the Diavik properties, where would you be looking outside of that and are you still actively looking there and is it financeable at this time?

Robert Gannicott

Yes, we are continually looking at opportunities that come along. Obviously the space for a start has always been thin. The reason that diamonds remain expensive is because they’re rare and they’re rare because they’re not easy to find. So there aren’t a lot of things out there to be bought. A lot of them are in parts of Africa or Russia that we would see as places that we don’t understand, if we don’t have particular expertise in or that represents perhaps a potential threat to the image of the brand.

So obviously there’s more of a focus in the perhaps the kinder of parts of Africa, Australia, Canada, and one thing that’s happened I guess with the current equity issues is that—current equity pricing, is that a lot of things have become a lot cheaper. So yes, we are actively looking at things and whether or not we can get a transaction together is another matter.

But it certainly will be at the top of our list of things to do would be to try and acquire something that represented both increase in diamond flow through what we view as a very effective sales platform as well as adding longevity to an operation that actually does work very well.

Operator

Your next question comes from the line of Patrick Morton - RBC Capital Markets

Patrick Morton - RBC Capital Markets

You’ve expected a pretty significant increase in costs as the mine goes underground in calendar 2009 and 2010, 30% and 25% in each of those years, can we still expect that or with this recent decline in costs, has something changed?

Alan Mayne

I can’t speak to 2009 calendar year but I think its fair to say that what you can see is we’re actually pacing well below that 25% guidance not only because of the pre-stripping matter but underlying cash operating costs at the mine are much lower then we had expected. So I think depending on mix of production and operating conditions we would expect to come in well within that 25% for this year and as Robert mentioned, he’ll be getting a sneak preview of next year next week but I think what we can say is that the new President at Diavik Mine, and [inaudible] a mining background, is well known for his operating skills and I think managing the operating costs down is one of his mandates.

So we’re pleasantly surprised by the underlying cash operating costs at Diavik Mine so far this year and I think with the skill set up at the mine, we would hope that that increase to 30% is going to be lower but we just don’t have visibility on that right now.

Robert Gannicott

As you can imagine like in any mine, the initial phases of it are expansion, expansion, push the mill to get as much through it as you can, got all the development projects and an awful lot of employees on site and extra services having to be provided and so on. During next year we get to the end of the upfront capital spend on the underground mine and so on and really then the project then settles down to sustaining capital spend and a bigger focus on managing costs down effectively and one illustration of that is PHP has certainly managed to do that. They’re gone through that. They’re two years ahead of us; they opened up two years ahead of us. They got to peak a couple of years ahead of us. They’ve now been focusing on reducing costs and have been able to do so every effectively there. So that’s certainly a focus of the operation going forward.

Operator

Your next question is a follow-up from the line of Analyst – Griffin Equity Research

Analyst – Griffin Equity Research

On your retail side, how does the mix work with the new factory opening up in Switzerland on the diamond watch production? How does that benefit the company and are these products exclusively sold on the retail side or are they being wholesaled as well?

Thomas O’Neill

How that benefited the company, from previous to the opening of the new factory we were in the sector of Geneva and we had several of the component parts of the watch manufacturing process scattered throughout the city. So the immediate benefit to us was to pull it all together under one roof which has worked very nicely.

The watches that we design, manufacture and market are done through two channels; one is our own retail network of stores which now number at 18 and then through a select group of third party watch and jewelry specialty stores throughout the world. That we keep very well controlled and we don’t expect to steer very far away from the core of the high quality accounts that we have.

But the watch business is both on the retail and the wholesale side.

Analyst – Griffin Equity Research

Are the bulk of those watches being sold internally or you’re focusing on the wholesale to expand? I mean you have a plant that may have a certain capacity, you have to operate that. So if you’re making a number of units are you trying to sell them internally or your focus is wholesale?

Thomas O’Neill

Our focus is dual. Certainly the investment that we’re making in our own retail network would imply accurately that we intend to market aggressively our own product in our own retail locations.

Analyst – Griffin Equity Research

But does it make sense to expand that watch production and expand the brand into a wholesale market?

Thomas O’Neill

We already are in the wholesale market.

Analyst – Griffin Equity Research

But in terms of watches are you going to expand that further? Is it going to be more of a 70/30 split, a 50/50 split, retail and wholesale?

Thomas O’Neill

Well keep in mind the kind of watches we sell. The least expensive watch that we sell in the market is around $18,000. So we have to know very carefully where the customers are who will buy at that introductory level price point. So the market itself will determine where and how expensive we can spread the watch business throughout the world.

We’re satisfied right now with where we are and we see growth opportunities, not in a way that we’d certainly next year blow the whole thing out into something huge because the watches that we produce are both fine mechanical watches, which have a limitation on production as well as the fine diamonds that we put in the other movement watches.

Operator

Your final question comes from the line of Analyst - National Bank Financial

Analyst - National Bank Financial

On the production side, given the issues you’ve indicated in Q3 and with the tougher winter season coming, do you think you might just make the lower end of your production, is that guidance more likely or up near the higher end?

Robert Gannicott

I think we have to stick with that bracket that we have to rely on the guidance as given to us by Rio Tinto and the bracket is between 10 and 10.5 and it doesn’t make any sense for us who are not actually operating the mine to try and make a guess that’s more refined then that. I think you have to accept that we’re in a—this always was going to be a year where we transitioned from one open pit to the next and the difficulties that are involved in tidying up one and moving on to the other and there’s a lack of precision [implied].

Analyst - National Bank Financial

On the retail side given the strong showing this quarter on the contributed earnings do you think this is a number we can carry forward in the upcoming quarters are was this a particularly strong quarter in your mind?

Alan Mayne

Well it was a strong quarter but I think what Thomas and the team have put out publically in the market that we target and I think it’s in our disclosure that we’re targeting plus 15% sales growth for the year. I think you can look at the control over SG&A expenses and obviously the business is lumpy and markets are somewhat fragile but I think we are expecting to see with that 15% increase at least in revenue material visible operating profit from that segment this year.

So that’s what I would say in that regard. We do think that this is the beginning of a favorable trend in the business and obviously subject to markets we would expect that to continue. The timing is what’s difficult to predict.

Analyst - National Bank Financial

Regarding the $4.3 million insurance payment this quarter, was there a net resulting gain?

Alan Mayne

Just to be clear, we have not received proceeds, we receive the proceeds in the third quarter. We expect proceeds of $5 million and we booked $4.3 million so there’ll be a $700,000 gain in Q3.

Operator

There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

Robert Gannicott

Thank you all for coming on the call. It was very pleasant to be able to discuss a good strong set of results like this and we’re dealing with a commodity here that’s got some real fundamental supply shortages and fundamental increases in demand and we look forward to a good future through this. Thank you very much.

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