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De Beers Net Up, So DB Line Bows

Strong demand for rough diamonds, lower stock levels and a reduced tax rate drove De Beers’ first-half total net profit up 18 percent to $308 million.

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LONDON — A healthy demand for rough diamonds, lower stock levels, and a reduced tax rate drove De Beers’ first half total net earnings up 18 percent to $308 million from $261 million in the six months ended June 30.

De Beers said in an abridged consolidated income statement Friday that earnings, excluding amortization, restructuring costs and one-time fees, rose 34.4 percent to $414 million from $308 million.

All figures were reported in dollars by De Beers Société Anonyme, a Luxembourg-based private company.

“This has been a good first half due to strong demand for rough diamonds,” said De Beers chairman Nicky Oppenheimer during a conference call with financial analysts and the press on Friday morning. “If the demand for rough diamonds continues through the second half, De Beers’ results for the year as a whole should be ahead of the previous year.”

Sales by the Diamond Trading Co., the marketing arm of De Beers, rose 2.7 percent to $2.92 billion from $2.84 billion in the corresponding period last year. The DTC accounts for the lion’s share of De Beers’ total turnover, which rose just 1 percent. The discrepancy between the DTC sales rise and the rise in total turnover was due chiefly to a dividend that De Beers’ trade investment division absorbed during the corresponding period last year.

The DTC’s sales of rough diamonds to its designated sightholders were driven in part by good results at retail in 2002 — and especially in the fourth quarter when 40 percent of all diamond jewelry sales are made. In 2002, year-on-year global retail sales of diamond jewelry were 4 percent ahead of aggregate gross domestic product.

Throughout the first half of 2003, demand by cutting centers for rough diamonds was strong, largely because of their willingness to hold higher levels of inventory as interest rates continued to decline.

De Beers also spurred profit growth by reducing its diamond stocks by more than $600 million. Gary Ralfe, managing director of De Beers, said during the conference call that by running down its diamond stocks, the company was able to “release profit,” improving its first-half return on equity to 19 percent from 16.4 percent and its return on capital to 17.5 percent from 13 percent.

De Beers said retail sales of diamond jewelry in the first two months of the current year were “encouraging,” but quickly lost momentum because of the slowdown in the global economy, the war in Iraq and the impact of the SARS virus on Asian economies. The company went on to say that, most recently, retail sales have shown signs of recovery.

De Beers also benefited from a more favorable tax rate, which dropped to 27 percent from 33 percent a year ago, according to De Beers finance director Paddy Kell.

The stronger South African rand was chiefly responsible for the lower rate, but it took a toll on De Beers’ production costs, which rose approximately 20 percent in the period. In the corresponding period last year, the exchange rate was 10.55 rands to the dollar, while during the first six months it strengthened to 8.11 rands to the dollar.

The company also trumpeted its ongoing goal to increase efficiency — and lower costs — by shortening the pipeline diamonds must pass through to get from the mine into sightholders’ hands. De Beers said it has already made the sorting process more efficient, and was happy to continue “liberating” rough diamond stocks.

During the conference call, Ralfe also commented on the company’s decision to slash 20 percent of sightholders from the De Beers books under the increasingly stringent Supplier of Choice distribution strategy. “It was painful to say goodbye to so many longstanding sightholders,” he said, adding that the new sightholder contracts have a two-year duration, and De Beers’ sightholder allocations are subject to the scrutiny of an independent ombudsman.

However, those sightholders who have been eliminated will be offered supplies by the DTC for the remainder of the year.

As reported, De Beers’ Supplier of Choice strategy is aimed at fortifying the relationship between De Beers and its best sightholders and working with those sightholders to stimulate consumer demand for diamond jewelry.

“The Diamond Trading Company is committed to driving growth in the diamond jewelry business and fighting for a greater share of the consumer’s disposable income,” said Ralfe, adding that De Beers’ goal is to see global retail sales of diamond jewelry grow 1 percent faster than GDP.

As for De Beers LV, the jewelry retail venture between De Beers and LVMH Moët Hennessy Louis Vuitton, Oppenheimer, who is the non-executive director of the venture, said three new Japanese shop-in-shops were on track to open in September while the launch of the Manhattan store, on the corner of Fifth Avenue and 55th Street in the space currently occupied by Louis Vuitton, would open in fourth quarter of 2004.

“After those openings take place, we hope to accelerate the rollout in Japan and the United States,” Oppenheimer said, adding that the partnership with LVMH was an “extraordinarily good” one.

As reported, the shop-in-shops in Tokyo, which span about 1,080 square feet each, will be located within the country’s major department stores, at Takashimaya in Nihonbashi; at Matsuya in Ginza; and at Isetan in Shinjuku. De Beers LV opened its first store, a 7,500-square-foot unit on the corner of Piccadilly and Bond Street here, in November.

Oppenheimer also confirmed that, so far, De Beers has invested $55 million in the joint venture. De Beers and LVMH plan to spend up to $200 million on the joint project.

Meanwhile, De Beers LV has unveiled a new collection of jewelry, based on the De Beers DB logo. The line, called So DB, features gold rings with diamond pavé and price points that start at $1,120. The DB Butterflies collection offers butterfly-shaped rings and necklaces with price points that start at $504, while the DB Star collection has jewels made from diamond pavé stars and prices that start at $2,720. The new gems were unveiled to the press at the De Beers LV Piccadilly store last Wednesday, and will go on sale in the autumn.

De Beers also reported it had arranged a $2.5 billion syndicated, multi-currency revolving credit facility, aimed at refinancing its $4.55 billion syndicated loan facility and for general corporate purposes. The new facility was aimed at a selected group of De Beers’ banks, and was oversubscribed, raising in excess of $3 billion, the company said in a separate statement.

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