Hello, and welcome to the Inter Parfums' second quarter 2020 results conference call. At this time, all participants are in listen only mode. If anyone should require operator assistance, please press star zero on your telephone keypad. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Russ Greenberg. Please go ahead, sir.
Thank you, operator. Good morning, and welcome to our 2020 second quarter conference call. Once again, it is not business as usual. I hesitate to adopt the overused phrase, the new normal, because our plans call for the eventual return to our long-term growth and profitability goals, recognizing that there will be detours and speed bumps along the way. There is no need for me to read out the second quarter comparisons that were in the release we issued yesterday afternoon. I will devote my discussion to explanations of those results and to balance sheet items, and then Jean will follow. As usual, however, I must read the following. This conference call may contain forward-looking statements which involve known and unknown risks, uncertainties, and other factors that may cause actual results to be materially different from projected results.
These factors include, are not limited to, the risks and uncertainties discussed under the headings "Forward-looking Statements" and "Risk Factors" in our annual report on Form 10-K for the year ended December 31st, 2019, the quarterly report on Form 10-Q for the second quarter ended June 30th, 2020, and other 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. One more recurring message. 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, Interparfums SA. When we discuss our U.S.-based operations, we are primarily referring to sales of prestige fragrance products conducted through our wholly owned domestic subsidiaries. Our consolidated second quarter gross margin declined to 54% compared to 64% in last year's second quarter.
The gross margin for European operations was 57% compared to 68% in last year's second quarter. Once again, the strong US dollar had a small but positive effect on our gross profit margin, which was offset by product mix and by a $2 million charge relating to the assumption of a return liabilities for products sold by a former licensee of a brand that we took over in 2019. For U.S. operations, gross profit margin was 43% versus 52% in last year's second quarter. As a consequence of the 75% decline in U.S. operations net sales, certain expenses such as depreciation of tools and molds, together with distribution of point-of-sale materials such as VOCs or vial-on-cards, amplified the decline in the U.S. gross margin.
As I turn to the discussion to expenses, once again, please keep in mind that the start of 2020, our operational budgets were based on our original projected sales of $742 million. As we have mentioned before, our sales in January and February, with the exception of China, were pretty good. In March, as COVID-19 took hold throughout North America and Europe, as sales ground to a halt, we curtailed our ad spending. However, we had advertising and promotion campaigns already underway, and there was not much we could do to limit those expenses. By the second quarter, we were able to reduce promotion and advertising included in SG&A expenses to 11.8% of net sales as compared to 21.9% in last year's second quarter.
As you probably know by now, in a typical year, we budget around 21% of net sales for advertising and promotion, with the fourth quarter accounting for the largest percentage. There is nothing typical about 2020. Since most of our planned 2020 launches have been rescheduled for 2021, we've significantly reduced our budgets for advertising and promotion expenses in dollars as well as a percentage of net sales for the second half of the year as compared to the corresponding period of the prior year. Our licensors have been extremely cooperative and accommodating during this period. They have waived or dramatically reduced our 2020 minimum royalty guarantees. Royalty expense represented 6.8% and 7.5% of net sales for the three and six months ended June 30th, 2020, as compared to 7.3% of net sales for both corresponding periods of the prior year.
Although SG&A expenses are down 62% compared to last year's second quarter, as a percentage of sales, SG&A expenses were 65% compared to 51% in last year's second quarter. For European operations, where second quarter sales declined 69%, SG&A expenses declined 66% and ended up representing 59% of net sales as compared to 54% in the same period one year earlier. At the end of the day, European operations remained in the black for the second quarter and for the year-to-date periods. For U.S. operations, SG&A expenses were down 44%, but represented 91% of net sales in the second quarter as compared to 40% in the second quarter of 2019. Our U.S. operations are significantly smaller than those of our European operations and carry a higher percentage of fixed costs that could not be leveraged as efficiently as those of our European operations with the precipitous decline in net sales.
In our last conference call in May, we talked about erosion of the positive leverage that we've enjoyed over the past several years as the loss of fixed cost absorption produced the decline of our operating margin. As you can see, our previous forecast of the greater decline in the second quarter sales and margin unfortunately came true. However, we also forecasted that the second quarter would mark a low point, and based on current sales and orders, that also appears to be true. That said, we are hesitant to forecast what will happen further down the road with the specter of COVID-19 still upon us, along with its economic consequences.
Our effective tax rate for European operations was 26% for the six months ended June 30th, as compared to 30% for the corresponding period of the prior year, with the reduction due to favorable tax rates in other jurisdictions where our European operations conduct business, such as Singapore, Switzerland, as well as the United States. Our effective tax rate for U.S. operations resulted in a benefit of 33.8% for the six months ended June 30th, 2020, as compared to an expense of 17.3% for the corresponding 2019 period. Due to the loss incurred in 2020, for federal tax purposes, we will be able to carry back that loss to 2015, when the federal income tax rate was 35%. The quarter with working capital of $386 million, including approximately $195 million in cash equivalents, and short-term investments. A working capital ratio of 4.8 to 1.
$48 million in untapped credit facilities and only $18.9 million of long-term debt, which includes borrowings made in connection with our equity stake in the parent company of Origines-parfums just last month. While accounts receivable are down significantly from year-end levels, these are difficult times for most retailers, and some have gone bankrupt. We have faced, and may continue to face, increasing delays in payment of accounts receivable from our customer. This is especially true of duty-free retail customers, as Jean mentioned on our last conference call. However, a significant portion of our receivables are covered by insurance, so our exposure is not significant. We also closed the quarter with considerable inventory, with the increase from year-end levels mostly in finished goods, which optimistically translates into we are ready to sell.
You will recall that on our last conference call, we had placed orders with suppliers late last year and early this year to support the 2020 new product launches. With the exception of Coach Dreams and L'Homme Rochas, which both debuted earlier in the year, our major launches have been pushed into 2021. With business picking up, inventory levels should improve as the year unfolds. Now I will turn the call over to Jean for a closer look at how we are doing and what we are doing.
Thank you, Russ, and good morning, everyone. While there is nothing redeeming about our recent financial performance, you may be interested to know that the second quarter of 2020 was our first quarterly loss since our IPO in 1988. We made it through the 9/11, the recession of 2008, and the loss of our largest license in 2013, which was representing 50% of our sales, and remained profitable. This is our first quarter loss. I think it's going to be the last one, because we do not expect to lose money in the third quarter and the fourth quarter. For the first half of the year, our net sales in North America, Western Europe, Asia, Middle East, and Eastern Europe were down. For North America, 39%. For Western Europe, 34%. For Asia, 53%. For Middle East, 57%, and for Eastern Europe, 56%.
In the first half, our two largest brands, which are Montblanc and Jimmy Choo, experienced sales decline of 50% for Montblanc and 43% for Jimmy Choo. Our next two largest brands, which are Coach and GUESS, had more modest year-to-date sales decline, 21% sales decline for Coach and 21% for GUESS. Following 2020 first quarter sales gain of 35% for Coach and 29% for GUESS. The virtual cessation of international air travel and corresponding loss of business with duty-free stores was a major factor in this precipitous drop in net sales, especially in Asia. Sales in connection with the two big second quarter gift-giving holidays, Mother's Day and Father's Day, were not surprisingly underwhelming. Hopefully, the upcoming holiday season will be a different story. During the Q&A session, I will be able to give you some picture of what's going on.
What we have seen thus far in the third quarter, which is July and the first 10 days of August, is, I will say, mixed with our business in Europe, showing positive trends in Asia, picking up in the U.S. That said, there are meaningful roadblocks in front of us. Even where and when stores have reopened, they are dealing, of course, with signage and sanitation, staff training, masks for staff and customer, shortened hours, and limiting, of course, the concentration of customers. We are, of course, concerned about how demand for our product is being impacted by deteriorating economic and political conditions, and factors such as high unemployment, reduced disposable income will play a role. These conditions are, of course, beyond our control, but our business model has gotten us through difficult times in the past.
To summarize, we are not capital intensive, as our 2020 CapEx budget is only $4 million. We have only 400 full-time employees worldwide, and they have been able to operate remotely and efficiently. In a typical year, approximately 2/3 of our expenses are variable, and our near-term fixed expense should come in at under $25 million per quarter. We have always maintained an exceptionally strong balance sheet, so we don't need to raise money, we don't need to hire more people to regrow the business. We are flexible, able to change course as facts on the ground change. These business characteristics haven't immunized us against the effect of COVID-19, but it hasn't shaken our conviction that we'll get to the other side of the crisis. We are moving ahead.
We have continued to bond, mostly virtually, with suppliers, distributors, licensors, retailers. Because of a common enemy, the virus, there is greater cooperation between us. We need to understand and respond to the pressures our partners face, and they need to do the same with our pressure points. Now for some recently announced very good news. We were able to ink two important agreements in the second quarter of 2020. The first one was this exclusive worldwide license with Moncler, which runs through 2026 with a potential five-year extension. Our first two fragrance for this iconic global luxury brand is scheduled for launch in the first quarter of 2022, and will be sold in Moncler stores as well as department stores, specialty stores, and duty-free shops. Moncler is best known for men's, women's, and children's outerwear collections, which marry the extreme demands of nature with those of city life.
Moncler has been implementing a selective brand expansion strategy, which currently includes eyewear, watches, sportswear, and footwear, making this iconic luxury brand more widely known and accessible to a wider audience. Fragrance is usually the entry point for luxury brand aspirants. We think this could be a reasonably big brand for us as it gains greater recognition and geographic reach, and enters more product categories. The second deal we inked in recent weeks was our 25% stake in Divabox, the parent company to Origines-parfums, a well-respected online platform and curator of skincare, haircare, cosmetics, and fragrance products. While Origines does have a few retail locations, 99% of its business is via e-commerce. You will see the site serves most of Europe. You can shop in French, in English, in German, in Italian, and pay in euro or pounds sterling and find hundreds of brands.
Some of these brands are ours, most of them are others. We now have a stake in our competitors' products and front-row seats into direct-to-consumer internet sales. This agreement will enhance the introduction of dedicated fragrance lines and products designed to address a specific consumer demand for this distribution channel and accelerate our digital developments. Origines is using our investment to strengthen its existing organization and raise its online visibility to support its development, not only in France but in all Europe, as it pursues its goals of becoming a European e-commerce leader for perfumes and cosmetics. We're going to take the questions soon, but I want to remind our listeners that I, along with Philippe Benacin, my partner, we are the co-founders of Inter Parfums, and we still own about 45% of the stock of the company. Our interests are in sync with our shareholders.
Russ and I want to extend our thanks to all our employees, our suppliers, our distributors, and our licensors for their extraordinary effort during this unprecedented period. Operator, we can open the floor for questions, please.
Certainly. We're now conducting your question-and-answer session. If you'd like to be placed into question queue, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing star one. One moment please, while we poll for questions. Our first question today is coming from Joe Altobello from Raymond James. Your line is now live.
Thanks. Hey, guys. Good morning. First question, I wanted to go back to some of the trends that you guys are seeing in July and August. Obviously, sales in the quarter were down 70%. I'm guessing that you exited the quarter at a much better rate than that given what we saw in April. If you could just give a sense for the year-over-year change that you're seeing in sales in July and August, and in particular in Asia. Are you starting to see growth in certain markets in Asia? Thanks.
Russ, you want to start answering Joe?
Yeah, I'll start, sure. Certainly, as I said in the remarks, that the second quarter was expected to be the worst. It took the brunt of the hit of this pandemic. We walked into the second quarter in April with pretty much almost a complete shutdown of the retail environment in most countries around the world. Even as we started to move a little bit through May and June, we started to see a little bit of a pickup. We discussed a little bit of it in the last conference call, which was in early May. Sitting here today, that trend has absolutely continued. Each month, we're actually exceeding our internal projections.
Internal projections.
Internal projections a little bit. It seems to be getting better as each month passes. We are still looking at certainly a difficult environment going into Q3, hopefully getting better and better as the year progresses. Jean, maybe you could talk a little bit about specific countries or things that we're seeing.
Yes, I share with you this feeling that we live on a daily basis. Each week are getting better, July was better than June. It was better than May, the first 10 days of August looks strong to us. From a territory point of view, Asia, again, like I said at our last conference call, Asia, because of their strength in e-commerce and the programs that we have on Tmall, especially for Anna Sui , Asia is holding up quite nicely. Europe is also picking up, the U.S. is starting to buy again. The good news is that we have a lot of inventory, so we're able to ship very fast. In less than a week, orders can be dispatched. We are taking the pulse of the retail very closely.
Like Russ said, for the last two months, we have been beating our own internal projection, which is a good sign. We are quite, how should I say, optimistic. We've seen the worst. Third quarter will not be down as much as the second, fourth quarter, w hich will start in October. We'll still ship some gift sets in October. We think that some business from our third quarter will go to fourth quarter. We are more optimistic than, let's say, three months ago.
That's very helpful, Jean. I was maybe hoping for some numbers for July in particular. If you wanted to share that.
You know that I'm not allowed to give numbers out unless we make a public statement.
Yeah. We probably will look to be able to reinstate some sort of guidance for the remainder of the year. Maybe in late August or early September. If the visibility continues to get a little bit more visible, then we will do something and put out some guidance at that time. Needless to say, things are looking better. I think the worst is behind us.
Okay. That's helpful. Then, just secondly on inventories. Obviously, your inventories are up year-over-year, but that's to be expected. What do retailer inventories look like? Is the channel fairly clean at this point?
Very light. All the retailers have very light inventory on hand. That's why we are seeing some actually quite large shipments started in July and continuing in August.
Okay, great. Thank you, guys. Appreciate it.
Thank you, Joe.
Thank you. Our next question today is coming from Linda Bolton Weiser from D.A. Davidson. Your line is now live.
Yes. Hi.
Hi, Linda .
Hi. I was just wondering, you've done a great job with getting your expenses down, and indeed, you said it would be below $25 million per quarter, and it was. Can you give us a sense for now that you're seeing business pick up a little bit, at what rate are you going to maybe start to ramp up those expenses a little bit? For the rest of the year, do you still think it'll be below $25 million a quarter, or are you going to start to ramp that up a little bit as business picks up? Thanks.
We do not-
No. From a fixed expense standpoint, our goal is to try to maintain that for at least the next two or three quarters. We do have a hiring freeze out. We are not looking to bring in more personnel. We've made plans with respect to the severe cutting or elimination of certain bonuses, and that is for the entire year. It is not just for one quarter. Our goal is to try to maintain profitability. If we're fortunate enough that the business continues to improve as we've seen, then, as Jean said in the opening remarks, this should be the first and only loss that Inter Parfums ever reports.
Okay, great. I guess with regard to your equity stake in Origines-parfums, can you talk about what your longer-term objectives are with regard to that? Do you think that there could be some reluctance by other fragrance marketers to carry their product on the website knowing that you have an equity stake? Thanks.
If you want to answer the first part, I will answer the second.
Well, sure. The initial investment is really to get a foothold in and understand what can be done in the fragrance e-com environment. This is one of several different initiatives that we have ongoing, to build an e-commerce business within our organization. Today, there is a changing environment that's out there. Clearly everybody is reading almost on a daily basis of a retail bankruptcy or some of our retail department stores shedding hundreds and hundreds of stores nationwide. The e-com environment is something that cannot be ignored. This is one of, as I said, several different initiatives to give us an insight into how fragrance can be successfully sold in the e-com environment. In addition, we can create product dedicated for this particular market, and use this as a testing ground. Again, it's all from the standpoint of education.
Yes. Regarding the question about.
The competitors
some of our competitors being reluctant to sell on a platform where we have a stake. We sell to Sephora. Sephora is owned by LVMH. LVMH is a competitor in the fragrance field. It doesn't create any problem for us, so I do not expect any problems with our competitors. Let's not forget that Inter Parfums is a pure player in the fragrance category. We do not do skincare. We do very little makeup. The company will be independently managed. From all the relationship that we have with our competitors, we do not see any conflict or any problems by us having a stake in this platform.
Okay. Thank you very much. I appreciate it.
Thank you, Linda.
Thank you. Our next question today is coming from Wendy Nicholson from Citigroup. Your line is now live.
Hi, guys. First question is, it's great to see you forging ahead and establishing new relationships and investing in the business. I'm also curious as to your stance with regard to share repurchases. You're still sitting on a ton of cash. Is it still too early from a confidence in the business perspective and liquidity perspective, or is now the time that you think about buying back more of your stock?
Russ?
That's an interesting question. We would rather use some of our cash, if we had excess cash, to reinstate our dividend, which we had paid out for at least the last 15 or so years. Buying back stock in a company where the two founders still control over 45% of the shares, puts us into a liquidity problem. I speak to investors all the time, and lately, over the last several years, it hasn't been bad because there is volume, there is trading, there is activity within the stock. I remember many years ago when the float was much smaller than it is today, and many more investors saw it as an obstacle. I don't think it would be in the company's best interest to go back to that sort of environment. Right now, there is no intentions of buying back stock.
When the board meets, we do discuss the dividend, and when we feel comfortable that this pandemic is behind us and our cash reserves are sufficient enough, then we'll reinstate dividends at that time.
Fair enough. Go ahead.
Yeah. The dividend is one thing, but the cash that we have is also for potential acquisitions. We think that there are, and there will be candidates, targets for acquisitions. I know that the latest one that we have done, were more like signing of a new license, Kate Spade, for instance, or MCM or even Moncler. We didn't have to pay for anything, but we will prefer to use the cash to make an acquisition than to buy back share.
Fair enough. Do you have a sense for kind of underlying consumer demand for fragrances? Just in terms of if people really are going to have different behavior, working from home for a prolonged period of time, socializing differently. Do you have any concerns about just the outlook for fragrance consumption or usage, if you will? Or do you still think it's something that women and men will use regularly?
Of course, we don't have worldwide studies, and it varies countries by countries. We do not expect a drop in the use of fragrance, maybe because our products are sold in 120 different countries, and each one culturally works differently. We do not expect a drop in the use of perfume. Maybe it will be different for makeup, which I think will have more casualty than fragrance. Talking to our distributors, talking to retailers, the problem today is more about the traffic in the store. Even that, it's changing quite fast. Let's not forget that we are getting into a better season. The third and fourth quarter are stronger for us in terms of buying period. This should help also.
Fair enough. Thank you very much.
Thank you. Thank you so much, Wendy.
Thank you. Our next question today is coming from Steph Wissink from Jefferies. Your line is now live.
Thank you. Good day, everyone. I have a follow-up question on Wendy's question. I'm curious if you can expand any of your licenses into other fragrance areas, or if you can just remind us, are you only relegated to body fragrance or are there opportunities to get into areas of body skin that might be fragranced or home with some of your existing licenses, just seeing as those two categories seem to be performing slightly better? That's my first question. The second one is just to understand changes in distribution and how you're thinking about it post-COVID. If you could remind us what your penetration was online going into COVID. Certainly with the minority acquisition, you're getting some insights into online. How you're thinking about the evolution of your distribution framework coming out of COVID. Thank you.
Of course. With many of the brands that we have under our license, we have a possibility, if we want to do h ome fragrance, for instance. For some of the brands, we have the possibility to do cosmetics. Again, we will be looking at the demand for this type of product and how it relates to the brand that we have in our portfolio. It's not because we have a right to do a candle, that we'll be successful to do a candle for this brand or that brand.
We have also the possibility to go into personal care. Again, we'll have to spend a lot of research before going into this category. Regarding the second part of your question, which is our distribution network today and e-commerce. We were under, how should I say, developed in the e-commerce sales for sure, because we were really counting on our partners, brick-and-mortar partners, to do business on e-commerce.
For instance, macys.com, sephora.com, all the dotcom of the brick-and-mortars were doing a good job for us. We think that now, with what we see in the distribution, we will be working much more directly and much more actively with Amazon, with what platforms dedicated to e-commerce fragrance. Russ?
Yeah.
Do you want to add something?
Yeah. No. It's exactly one of the reasons why we entered into the agreement and the equity stake in Origines-parfums. Again, this was one area. Amazon, of course, is another. We will be trying to work with several different e-commerce partners, to try to build up that part of the business. We're certainly not going to ignore the existing brick-and-mortar and the existing perfumeries around the world. Certainly, we believe that e-com will become a bigger part of the overall pie as time goes on. We need to be intimately involved with it.
Thank you very much.
Okay. Thank you, Steph.
Thank you. Our next question today is coming from Hamed Khorsand from BWS Financial. Your line is now live.
Hi. Can you quantify your previous comments about sales looking better? Is this because the dollar is weak now, or is it actual unit volumes being sold?
No. I'm not talking about the dollar, I'm talking about the units.
Yeah. Absolutely. We would always be talking about the units, and it's volumes that are going through the different sales channels. As I mentioned in the opening remarks, the sales that we've seen, the orders that are coming in, it's a constant flow, and each month seems to be getting a little better and better and better. That's why we're expecting certainly that the third quarter should be substantially better than the second quarter, and then moving on to the fourth quarter. As I said, we are hopeful that we will be able to give you some real quantifiable numbers and some real guidance as we approach early September.
Okay. My other question was, what is your advertising spending in such an environment now, especially given that you're talking about sales increasing? Will there be an increase in the percentage of ad spend to the sales?
No. Again, we do not want to increase our spending this year. This year is really a year where we're going to do our best to go through. We will make money, as I said, in the third and fourth quarter. Some investments, especially some just before Christmas, will happen. We keep our advertising investments to the minimum.
Yeah.
Again. Yes, go on. I'm sorry, Russ.
I was just going to say, most of the major launches that we have were pushed out to 2021. We'd rather see the ad spending go along with the major launches as opposed to just the continuation of business. We are expecting that, I think I said at the end of last quarter, that we're looking at an A&P spend of maybe 17% or 18% for the full-year. Certainly lower than the 21% that we had seen in years past.
Okay. I appreciate it. Thank you.
It's a good question because in a normal year, when we see our sales going higher than projected, we have the tendency to spend more in advertising. Here, we're going to be very, very reasonable in terms of spending.
Thank you. I appreciate it. Thank you.
Thank you. We've reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.
Oh, yeah. Certainly. Thank you, operator. Thank you all for tuning in to our second quarter conference call. As usual, if anybody has further questions, I can be contacted by email. Stay well and stay safe, and thank you again. Bye-bye.
Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.