Q4 2019 Earnings Call
These factors include but are not limited to the risks and uncertainties discussed under the headings forward-looking statements and risk factors in our annual report on 8,000 and the reports we file from time to time with the Securities and Exchange Commission. We do not intend to and undertake no duty to update the information discussed.
When we refer to our european-based operations, we are primarily talking about sales of prestige fragrance products conducted through our 73% owned French subsidiary page inter performs, SA.
When we discuss our United States based operations, we are primarily referring to sales of prestige fragrance products conducted through our wholly-owned domestic subsidiaries home.
Before I review the final quarter and full-year results. Please be mindful that a strong US dollar has a negative impact on our sales but a positive effect on our gross profit. Margin. This is because over 45% of net sales of our European operations are denominated in dollars off almost all costs of those operations are incurred in Europe. The average dollar euro exchange rate for the 2019. Fourth quarter was 1.11 compared to 1.14 in the fourth quarter of 2018. The difference for the full year is over 5% off the average dollar euro exchange rates will 1.12 and 1.18 for the 2019 and 2018, respectively.
With regard to the final quarter of 2019 as compared to 2018 net sales were 177.8 million up 3% off 177.2 million at comparable foreign currency exchange rates net sales increased 1.5%
That's sales by European based operations decreased 4.2% to 129.1 million from 134.8 million months. And that's sales by US based operations came in at forty eight point seven million up 14.7% compared to forty two point four million.
Gross margin was 64.5% compared to 66.1%
sg&a expenses as a percentage of net sales were 57.6% compared to 60.1% in 2018.
Operating income Rose 16 and 5% to 12.3 million as compared to ten point six million operating margin came in at 6.9% as compared to 6.0%
that income attributable to enter Performance Inc. Increased 1.8% to 8.2 million as compared to 8.0 million and finally net income attributable to enter performs per diluted share was $0.26 for both.
So for the year ended for the full year ended December 31st, 2019 net sales total 713.5 million resulting in metal. I'm a tribute able to enter performs of 60.2 million or $1.90 per diluted share. This is a 5.6% increased in sales rep a 12% increase in net income attributable identify farms and an 11.1% gain on diluted eps.
Our Consolidated gross margin was 62.5 and 63.3 in 2019 and 2018 respectively off while the strong dollar benefited our gross margin that benefit was offset by the higher than typical costs for sales of Mont Blanc Explorer which launched the first quarter of 2019 and rolled out throughout the year essentially for that reason the gross margin for European operations declined sixty basis points to 65.7% from 2018 S60 6.3%
For us operations, gross margin increased to 52.5% from 51.4% in 2018 that 110 basis point Improvement is primarily due to increase sales of higher-margin prestige products under licenses the slight decline in our Consolidated gross margin also reflects the fact that in 2019 our us operations grew at a faster rate than European operations in 2019 us operations represented 24% of Consolidated sales versus just over 20% in 2018.
For us the big story is our operating leverage in 2019 selling General and administrative expenses Rose two and half percent on a 5.6% increase in net sales. And as a percentage of net sales sg&a expenses came in at 47.8% and 49.3% for 2019 and 18 respectively once again promotion and advertising that's included in selling General and administrative expenses incurred in the fourth quarter, which brought the total for the full year to 20.3% of net sales down slightly from the 20.7% off in 2018.
Why we budgeted 21% of net sales for this expansion expenditure in 2019 minor fluctuations in certain launch schedules require a change in our spending in 2019. There was a 1.1 million loss on foreign currency while in 2018 that lost 1-0 point three million an hour effective. Income tax rate came in at 27.7% in 2019 versus 27.3% in 2018.
Cash provided by operating activities aggregated 76 and 1/2 million in 2019, and we closed the year with working capital of 389 million including approximately $253 billion in cash cash equivalents and short-term Investments. We had a walk-in Capital ratio of over three to one and only ten point seven million of long-term debt.
Now to the outlook for 2020.
While the fundamentals of our business remain strong like most companies doing business around the globe hours is being impacted by the coronavirus while wage is nearly impossible to calculate the full potential impact of the coronavirus on our company at this time. The only certainty is that the next several months will be challenged Beyond China. There are now new cases cropping up around the world as a result of this situation and the corresponding and significant decline in air travel and consumer traffic in key shopping areas. We postponed several launches until later this year for these and related reasons. Our 2020 guidance needs to be revised. If the impact on the coronavirus is limited to the first few months of this year. We expect 2020 net sales dead.
and earnings
To be in line with our 2019 results. Obviously. Our expectations are subject to change with the fluidity of this situation with John, please continue.
Just thank you and good morning to you all we will talk later. I'm sure you have questions about our plans and off during this coronavirus crisis, but before moving on to our future plans, I will review our sales performance by region and the message I wish to convey here is that we are building upon successive years of growth. For example in North America. Our largest market 2019 sales were 11% ahead of 2018, which we're 19% ahead of 2017 similarly sales growth in Western Europe of two and a half percent wage 2019 comes on the heels of 9% sales gains in 2018. Also in Eastern Europe net sales Rose nearly 5% wage.
layering upon the
1% gain in the preceding year, the biggest percentage Gainer was in the Middle East were in 2019 sales increased 22% of the 2018 which is 17% ahead of 2017. Also in Asia our firm largest market we're done nominally in actual dollars in 2019, but am in constant dollar which we considered quite respectable in light of trade tariffs on Goods coming in and out of China from the United States. Also, keep in mind our sales in Asia and 24% in 2018 sitting your high bar for your just ended. I will smallest Market Central and South America has continued to decline
Moving on to Brand news. We are moving forward with our plans to build two new fragrance Enterprise with the Kate Spade Brandt which we signed agreement in June of last year respectively as we have reported while retaining too popular Legacy cents live colorfully and walk on air for which distribution should commence next several weeks and we will and will not an entirely new woman sent in end of the summer beginning of a fall.
We are also very enthusiastic about our new worldwide licensing agreement with MCM that we signed in November.
Since 1976 is German fashion house has been pushing fashion boundaries and redefining large luxury leather goods on the global scale through Innovation off Cutting Edge technology, exceptional creativity and Superior Quality. So our team has began work on developing an extraordinary fragrance for women and men took the initial launch targeted for the first quarter of 2021 will will be ready we thinking January of 2021 and I will distribution strategies includes MCM stores high-end department stores Prestige Beauty retailers with the geographic focus on Asia America and Europe.
Was he got well.
Lion King is still number one specially we will launch of Explorer which followed by Jimmy Choo number two and number three months. Hi there in less than two years guess has taken over first place and gets could be coming the next two year number three brand in the company the importance of importance of his ranking cannot be overstated some of you into the school have been following our progress for how long time and will remember that not that long ago one branch. I come from more than half of our annual sales today for brands in the aggregate have more than filled with space making it's making as much took your company.
Moving on to our launch pipeline for the year. We have already unveiled several new products including dreams which just launched and he's doing some great numbers at Macy's we were last month. Excuse me last week. We were in the top five at Macy's we have lunch also bizarre birth and Longhorn both recently began to roll out when you woman signature scent Forum long is still scheduled for June Fest has it will be called Signature but keep in mind mobile Explorer which for which role that in 2009 was a huge success for the smell Centric brand a woman sent from mobile is not expected to perform comparably.
Well moving ahead with Jimmy gulibon L product, even though it's still Small Program with limited distribution. Our primary goal is is interesting these products and see if we can expand the ceiling space for our Jimmy Choo fragrance like the new woman sense coming to Market in the second half.
Moving onto US based product launchers a new member of your family could be license recently debuted domestically off focus in 2020 will be launching a blockbuster fragrance which includes Bella Vita perfume and Bella Vita order toilet. Both are not planned to be introduced domestically in the spring and internationally internationally in the fall. We are also working on a men's fragrance and grooming line that will be schedule for month end of the end of the year for a grooming Line women's land will happen in 2021. It is worth noting that gas is a major brand in the Middle East will also happen to be our fastest-growing Market in 2019. We had planned on introducing the gas brand in China this year, but the decision and its timing will
Of course, we'll have to wait.
Well, it's going to test some guests color cosmetics in guest stars who are moving of course conservatively on this, but the goal is to use color Cosmetics mm for brunch frequent distribution.
So before the onset of a Corona virus, we were confident that we launch of the new fragrance called Sky by industry will be a catalyst for 2020 brand sales growth. I'll show you the biggest market for a nursery. And therefore we have decided to push back the launch to fall 2020 within two weeks Thursday. We will be launching a new collection for graph inherits selective luxury distribution will be planned for the fall and we have also a number of brand extension plans for the new fragrance Jewel called Kenyan Escape is being ready for a mediator introduction.
I reported on our last conference.
Tools that we have extended our licensing arrangement with your scavenger hunt a brand through the end of 2051 and we've been we've an additional five year extension option after that and more recently. We have extended our license for Abercrombie and Hollister.
How do you get the two new brands to our portfolio in 2019? We have a lot on our plate off to build new frequency Enterprise, but that doesn't mean we are we are not prepared to server and last hour past for you as we have seen many times over. We've got the financial strength of the human talent and the drive to entertain transaction that are compatible with our business model that are backed by solid licensing partner and of your Superior growth potential.
Before taking your questions. I want to mention the trust will be meeting with investor and consumer group conference on March 12th now operates, so let's open the floor for questions. Thank you.
Thank you.
We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad a confirmation total indicate your line as in the question queue, press star to if you would like to remove your question from the Q4 participants using speaker equipment. It may be necessary to pick up your handset before pressing the star key. One moment, please while we pull for questions.
Thank you. Our first question comes from line of Linda Bolton wiser with d a Davidson. Please proceed with your questions.
Yes. Hi. How are you? Good morning.
So I guess what we did in our model is we just reduced the revenue and earnings for the first quarter since that's what we're seeing is the current impact. Can you give us some sense of what you're seeing in your Market wage and the magnitude of the declines? I guess we were thinking if travel retail is 20% of your Revenue. Maybe it's down 50% So maybe your revenues down ten or 12% in the first quarter is a month along the right lines. Maybe you could just give us a little color on what you're seeing.
Ross
Oh, yeah. Sure. Well, you're you're you're you're actually very very close looking looking at the numbers for January and February the sales team actually surprisingly holding up surprisingly. Well, it's really the March month that we're anticipating the most significant decline wage. For those of you who saw the press release that was put out by our European operations. We've indicated that sales for the European operations were anticipating that they're going to be down approximately 10% for the first quarter us operations so far as I just mentioned, we really have not seen a significant impact. We often think that the sales at best will be flat but I think we can actually achieve that so far from what we've seen with the orders that we have in the system off.
Those sales should be able.
To come in very very similar to that of last year. So with that the combination we're looking at at first quarter, you know somewhere or you know down maybe 8% or 7% something along those lines.
Yes, ma'am. If I if I may add to give you a little bit more color when this coronavirus start at the very beginning we were we where we read the first about the the supply of certain components coming from China because we have some juice and some metal and some special cut-ins coming from China, but because of terrorists that started we with China in the middle of last year. We have we had already started to to look at alternative sourcing before the coronavirus. So we thought we we have not we're not worried about any impact any serious or material impact on supply of components coming from China Club.
Actually we have not.
We have alternative sources, but we have seen factories going back to work at the rate of maybe twenty-five to thirty percent two weeks ago. Maybe now we have that we are up to 50% So we have we are receiving path from China. The problem is really the cells and the cells. Of course, we we immediately moved the uh, some launchers, especially the NS Freelancers, which we are going to do in the second quarter. We moved it to further and forth quarter for all the Asian region, but the problem like you said that is is not only China. It's a whole region. It's a travel retail. It's a Chinese tourist buying office in Europe or or elsewhere and is this is what will be missing but it's true that so far January February started the dog.
Okay, I'm quite.
But we're going to start feeling the pressure in in March.
Thanks, and then just on the cost side as you face a little bit of sales decline here in the first quarter. Are you doing anything cost-wise to try to mitigate the name operating leverage or are you just kind of keeping things as is I guess your sg&a is running at about $36 million per quarter. Is that something you can reduce in the near-term or just keep the same business as usual? Well, I I'm sorry. Go ahead. No. No, I will say that as I have moved some launches towards later in the year. A lot of advertising money will be spent later in the year, but but although so this is for Monday for the marketing and advertising but besides that our DNA is the same plus yeah, that's that's exactly right. They the the pig.
in a is is not something that we
Can really move the needle on every very very easily but fortunately for us a good portion of our sg&a expenses is of the variable nature wage. And therefore those will follow. However, the the fluctuations are with respect to sales marketing is Ron mentioned is one area where you can control and wage is typically spend much less Marketing in the early part of the year than we do in the later part of the year. So hopefully we won't see too much of a significant erosion from the from the positive or average that we've seen over the last couple of years.
Okay. Thank you very much. You got it. Thank you.
Our next question comes from line of Wendy Nicholson with Citigroup. Please proceed with your question. Hi, my question is actually bigger picture taking a step, you know away from coronavirus wage rest the operating leverage you talked about. I mean the margin you put up for 2019, you know is is higher than I think we've ever seen or or at least in a very long time. And so how do you feel about that? And and where we go from here just structurally again. I know 20/20 is going to be an anomaly and there's lots of moving pieces, but but but sort of I you know longer-term how much more juices there and and how much higher can those margins go when it's a great question. Thank you for asking the question. You know, it's it's actually very very pleasing for us because back just just a few short years ago. We kept talking about achieving, you know, fourteen fifteen percent operating margin we came in this court wage.
14.7% operating margin, which did not reach the highest we've ever been.
We have exceeded 15% and actually got pretty close to you know to 16% in a full year back several several years ago. Our goal was always nice to kind of reach that 15% I think that you know again barring the the unfortunate situation that we're seeing in 2020 as we move forward if we can continue to grow our Top Line like we have over the last several years. I think we can start broaching that 16% operating margin level, which is probably one of you know a very high life for our industry. So that's a that's a an achievement that we're we're very very proud of
Got it, and then just generally can you talk. This is sort of big-picture. I mean part of what's helped you get there is strong Revenue growth, and I know your market share is have been great, and you have to remember that a brand activity that's been successful. But also, you know, we've been in this kind of multi-year. We're fragrances generally have been a good space. So, can you just talk about kind of your outlook on maybe what you saw through the course of nineteen how much of your growth is being driven by sort of the increased willingness on the part of Asian consumers to use fragrance again, forgetting the coronavirus just high level on which package or take on on on the industry Dynamics today. Thanks.
I can do that with a portfolio that we have. We have been quite pleased with with a growth because we have been able to grow quite strongly in many parts of the world. We have Moonglow that is strong in Northern man. Market wage have also some Brands like Santa or in only originally but when you look at our growth in 2019, 30% interest or 20% in Europe, it's quite it's quite impressive. What's going we've with Asia it is absolutely true that we we we believe that Asian population will use more fragrance than before and we have seen these years after wage.
Because people used to say that all lights are near markets for her skin care of course and makeup, but we think that we've seen a specialist southeast Asia growing very strongly with our frequent. If on the top of that we give them some brands that they recognize such as a coach or Jimmy or lava. Oh, oh of those that we have in the bottle you this will accelerate the group. So coronavirus aside, we think that we are very odd position and 2020 was going to be a good year Corolla on the side, but long-term, we think the boss for you is well-balanced. We think we can leverage again our our G&A. So we are we are quite confident. Let's not forget also that wage.
the with the existing
Show that we have the existing two people we can do more cells than what we have we can have we we could signed new license and we are working well working on the on some deals right now. So we will definitely not stop increasing the the portfolio.
Great. Thank you very much. Thank you Monday.
Our next question comes from line of stuff. We think with Jeffries, please you see with your question. Hi. Good morning. Everyone breakfast quick question. Good morning, John as well. And Adelaide launch for honestly, and I just wanted to make sure we had calibrated all of the changes in the timing of the calendar was that the only launch that was pushed from the first half to the second half.
Yes today I have decided to keep to keep all the lunches almost. I mean plus or minus couple of weeks back almost on time except for an SV because anniversary the ninety percent of the business of anesthesia Nation. So we keep we do not change the calendar of launchers Thursday. We will maybe spend a little more than than what we fought during the launchers in order to have some money left to re promote 12,000 for you if need be and I think we will need to to to reap remote to keep our market share her towards the end of the year.
A great. Thank you. And then have you
For you just a question and follow-up to Linda's question regarding coronavirus. Can you help this sequence the staging of actions whether it's on your you know Supply recalibrating or as you were talking about some of the demand changes. Are you seeing reduced reorders right now, or is it that your future orders are being cut back as the channel Supply is not working through maybe just give us a sense of what the Cadence of actions are that you're seeing coming through March and how we should think about potentially a bit longer of a drift of the impact Beyond just the immediate demand.
Yeah, that's a it's a it's a very difficult question to answer because we're just starting to see some of the impact just just now within the last few weeks off things change. Well, he doesn't exactly things change very very quickly as this virus has spread. I mean just think of what's happening for the past two weeks. Look at your stock market is really has has declined within a one week. So it's really difficult for us to try to predict what's going to happen in the future right. Now. We do see some effect. Of course in the in the travel retail that is the area that has been is is mostly hit as long a certain areas. We have become no-fly zones, but to the extent of of how that's going to spread and to the extent of how long or the duration of these birth.
no fly zones are going to last this is
Something that's really unknown and almost impossible to to to try to make a prediction at this time.
Yeah, I'm going to try to add to give you some colors cuz I've been on the phone with many Distributors and many operators in the last last week actually and what we see is definitely a big downside in in in travel-retail. Some airports are completely empty page. So of course if if is not Travelers, there is no sales on the other hand. I was and I want to stay very very prudent and very conservative in China in mainland China where as you know, there is a lot of sales done through eCommerce, very, was quite strong in the last month three weeks. So I was looking at sales. Actually they were were much better than than what we expected. So, of course the business is down, but we've we've
because of of of our strength
You got mail from China. I think that it's going to be it's going to be a little bit better than what we think and I think also but this is a personal opinion that China will be the first to recover. We are more worried about travel retail in general Europe. As you know, Italian has been hit. We don't know what's going to happen in France or in Germany in the next hours all days, which is why we have wage almost zero visibility today on this very important Market.
Thank you very much. Thank you. Very very special. Thank you. Could you just remind us that final question for a quick one on the Jimmy Choo license that expires June license? Oh that that was let me see if I can quickly type. I think it's two thousand and thirty something but let me see if I can Club will find that will find that maybe we take another question and and we find out I have it right here December 1st 2031.
Thank you.
So we have another ten years. Yeah, at least ten years. Yeah. We had recently renewed that license. If if you don't know if you remember when Jimmy Choo was taken over by the the Michael Kors cake. We had just shortly after that acquisition. We had signed a new license with Jimmy Choo and added through the existing license. Thank you, sir.
Our next question comes from line of Hamid course and with the Ws Financial, please proceed with your question. Hi. So first off just to get the corona out of my mum. What kind of a component sourcing are you conducting right now or is there any shortages on that front for you?
As shown interest indicated just a few minutes ago that we really have not seen any significant impact from the standpoint of the supply chain. There were processes put into place even back in early in 2019. When we started to see the effects of the terrorists that were enacted between the United States and China. We had begun to create alternative sources for our components in in addition, you know, the virus also hit right at the same time is the beginning of the Chinese New Year. So even for those parts that we still do acquire from China most of the parts that we needed at least for the first portion of 2020. We had already received because we knew that China was going to close down for several weeks to Chinese New Year. So and today as Jean mentioned wage
Shipments are starting to come in. We were fortunate enough that we did not have any factories in the area. That was most hit with the coronavirus in China so far. We really have not seen any significant impact from a supply chain standpoint.
Okay, and my other question was in the change in the sales composition just given what's happening in travel-retail. How is that changing your ad strategy? And is there going to be a change in in the cost estimate for this year?
No, I think it's really just a change in the allocation of dollars. We've certainly have gone with more dollars spending in social media type activities and content related activities down for the advertising. I will still stand at the approximately in a normal year. I should say right around 21% 2019 came into 20.3 compared to 20.7 + 2000 + 8 + 18, but from an overall budgeting standpoint, I think was still looking at right around 12% sales to be spent in A&P.
Okay.
Thank you. Thank you very much. If if I met before we take the next question, I would like to answer a question that people have not asked it's regarding inventory because dead.
I think it's important to to say that we have not really lowered our our goal inventory. Meaning that we think that when this coronavirus will will will be finished. The market is going to need a lot of products in a very short. So we think it's important to maintain May what could look maybe a higher level of inventory for the next two or three or four months because when the demands especially in Asia will come back. We'll have to supply very very often.
Okay, next question. We have no further questions at this time. Mr. Greenberg have now like to turn the floor back over to you for closing, Okay. Thank you, Christine. Thank you all for tuning into our conference call and as usual with anybody does have any further questions. They can contact me at my office everybody. Have a great day. And thank you so much. Bye ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.