ANNUAL REPORT CONTENTS CONTENTS CORPORATE OVERVIEW 06 Chairman’s and CEO’s Statement 10 About L’azurde 12 Key Milestones 14 Profile of the Board 20 Profile of Executive Management STRATEGIC BUSINESS REVIEW 26 L’azurde’s Principal Business Activities 28 Business Description 32 Business Model 50 L’azurde’s Ownership Structure FINANCIAL PERFORMANCE 62 Dividend Policy 66 Risk Factors 72 Key Financial Highlights CORPORATE GOVERNANCE 86 Board Formation 102 Policies and Code of Governance 118 Communication with Shareholders 124 Audit Committee Report CONSOLIDATED FINANCIAL STATEMENTS 128 Consolidated Financial Statements 2 3 CORPORATE 01 OVERVIEW 01 | CORPORATE OVERVIEW CHAIRMAN AND CEO’S STATEMENT CHAIRMAN'S AND CEO'S STATEMENT All the above-mentioned factors have contributed to reducing Looking back at the past year, 2019 was marked with major the Company’s net profit. In addition, L’azurde adopted the new actions and initiatives taken by L’azurde in both markets in Saudi accounting standard for Leases (IFRS 16) that took effect from Arabia and Egypt, putting the Group in a stronger position to January 1, 2019 and resulted in an increase of SAR 4.5 million deliver its longer-term growth ambitions. in finance costs. Egypt subsidiaries’ corporate tax expenses increased as well in 2019, due to the expiration of tax holiday. From the rise in total retail channel revenues, up to the addition Before exceptional items and sales returns, the net income was of TOUS with 26 stores in KSA, and the promising launch of equal to SAR 23.0 million. the new Miss L’ fashion jewelry line, L’azurde finds itself well- equipped for the future. MAIN ACTIVITIES AND KEY ACHIEVEMENTS IN 2019 The Company reported strong top-line performance in 2019, with the Group operating revenues for the full year amounting to SAR In 2019, L’azurde took steps to shift its business strategy in its KSA CHAIRMAN’S AND 481.2 million, an increase of 18% compared to SAR 406.4 million wholesale channel to counter the increase in gold prices. The in 2018. The Company succeeded at protecting its 60% gross Company worked on altering the product designs and reducing margin, as it generated a gross profit of SAR 287.8 million, also the average weight of its jewelry production in order to meet the 18% higher than last year. evolving taste and budget of its clients. Besides securing that CEO’S STATEMENT customers are stocked with the right low weight products and In 2019 however, L’azurde made the difficult decision to accept the latest fashion trends, those steps were largely supported by one-off sales returns of the heavier gold jewelry in its KSA celebrity endorsements. wholesale channel due to the Gold price increase and volatility. In addition, after many discussions the Board decided to scale down For instance, and as part of its multi-celebrity marketing the L’azurde own brand retail KSA business from 15 to 4 shops strategy, L’azurde has launched two campaigns in 2019 in in order to eliminate unprofitable operations. This consolidation collaboration with the newly appointed celebrity, Myriam Fares. resulted in one-time write-down of inventory and will position The first campaign featured the iconic My Path collection, the Group to start the year 2020 with a much better inventory whereas the second campaign was unveiled at the end of 2019 situation. Those two deliberate decisions had a negative impact and displayed a stunning array of 21k and 18K pieces constituting on the net profit, resulting in a net loss of SAR 17.5 million for the the new ConneXion collection. The year 2019 also marked the year compared to SAR 17.7 million of net profit for 2018. launch of the Written in the Stars collection by Lady Fozaza in Saudi Arabia; the newest line was also launched in Egypt for the 2019 NET INCOME AND BUSINESS PERFORMANCE very first time. In 2019, L’azurde witnessed a growth in its retail channel revenues On the production level, L’azurde restored the production in the biggest markets in both KSA and Egypt. In KSA, the retail capacity in KSA swiftly and efficiently to fully produce all the revenues increased by 59% mainly due to the consolidation of KSA products in KSA instead of importing some jewelry finished TOUS franchise brand that was acquired in the fourth quarter goods from Egypt due to a change in the importation process. of 2018. In Egypt, the retail revenues also increased by 47%, on L’azurde has streamlined labor-intensive processes to drive the the back of the increase in sales in the existing shops, and the efficiency of its production processes, in its efforts to charge a Mohammed Ebrahim Juma Al Shroogi Selim Chidiac successful opening of four new outlets. premium labor service charge, meet a wide variety of consumer Chairman Chief Executive Officer tastes and create distinguished pieces of jewelry. On the wholesale level, Egypt had a great performance with a growth of 19% compared to last year, due to successful On another note, L’azurde worked on strengthening its retail advertising campaigns and strong customer uptake of new network in 2019 through the opening of four new showrooms at Looking back at the past year, 2019 was marked with major collections. top locations in Egypt, and the closure of seven non-profitable stores in Saudi Arabia. The retail network in the kingdom is now actions and initiatives taken by L’azurde in both markets in In KSA, however, wholesale revenues suffered a decrease of 19% appropriately lean and efficient with four well-located stores compared to last year, mainly because of the sharp increase in covering the major cities. Saudi Arabia and Egypt, putting the Group in a stronger position gold prices, in response to which, the Company had to go through to deliver its longer-term growth ambitions. a set of measures aimed at addressing this challenge. In fact, In 2019, the Group invested in the new franchise brand TOUS, L’azurde opted for a change in its jewelry designs, reduced the by strengthening its organization through skills training and average weight of its jewelry production while making sure that capacity building for the staff, enhancing product assortment, the new products meet the evolving consumer taste and budget. implementing product launches and gift-with-purchase offers, Moreover, the Company accepted returns of heavy gold jewelry as well as conducting many in-store activities. Furthermore, items, on a one-off basis, in a way to ensure that both customers TOUS collaborated with a large number of local influencers in and retailers have the right products at hand. The one-off costs 2019 with the objective of increasing the brand awareness, and also affected the operating profit that suffered a decline from celebrated the launch of new and exclusively designed collections SAR 69.9 million to SAR 46.7 million. This decrease of 33% was for the Saudi market, through two grand opening events that also due to an exceptional provision amounting to SAR 17.8 generated major media outcome and contributed to the growing million mainly related to the consolidation of L’azurde retail success of the brand. shops in KSA from 15 shops down to 4 shops. 7 01 | CORPORATE OVERVIEW CHAIRMAN AND CEO’S STATEMENT OUTLOOK FOR 2020 Building on the corrective initiatives L’azurde has taken over 2019, and considering the underlying fundamentals In 2020, L’azurde Group will sustain its efforts to further supporting the jewelry industry on the long run, we believe improve its business performance, in order to better position that the Group is well positioned to continue leading the Middle itself for future growth. We will continue to focus on the East and North Africa region’s jewelry market, as the largest execution of our strategic initiatives, namely: gold and jewelry designer, manufacturer, and distributor, and as one of the highly renowned brands in the Arab world. • Pursuing the growth of our wholesale and retail businesses in Egypt. To conclude, we do look forward to a fresh and strong start in 2020, and we would like to express our thanks to our • Further driving our TOUS retail business in KSA. customers, shareholders, employees and partners for their • Growing the new Miss L’ line to its full potential and continued trust and commitment in our success. material contribution in the next three years. • Step-changing the wholesale KSA profitability through better products and lower working capital. • Reducing working capital through improved collections, lower priced jewelry, shorter AR and manufacturing efficiencies. • Digitization the wholesale B2B market through RFID technology and developing the retail omni-channel strategy. • Pursuing our M&A strategy by identifying attractive targets where we can add value, grow our profits and offer attractive return to our shareholders. • Further protecting and improving our positive Cashflow. CHAIRMAN’S AND CEO’S Mohammed Ebrahim Juma Al Shroogi STATEMENT Chairman As a major step forward in 2019, L’azurde launched its new high potential fashion jewelry line Miss L’. Miss L’ offers a wide variety of 18 K gold jewelry products sold by piece in KSA and Egypt, and builds on the fast growing segment of fashion affordable jewelry globally and in the region. Miss L’ is sold today at L’azurde mono- Selim Chidiac brand shops, Miss L’s own dedicated kiosks and Chief Executive Officer at key third party fashion retailers in malls. The new line represents a high potential growth opportunity for the Company where for the very first time L’azurde enters a major fast growing segment at high gross margin, very low working capital and highly attractive value proposition to consumers.