APR Co., Ltd. (A278470) Earnings Call Transcript & Summary

Good morning, and good evening. Thank you all for joining the conference call for the APR earnings results. This conference will start with a presentation, followed by a Q&A session. [Operator Instructions] Now we will begin the presentation on APR's Third Quarter of Fiscal Year 2024 earnings results.

[Foreign Language]

[Interpreted] Good morning and good afternoon. My name is Jae-Ha Shin, Vice President of APR Corporation. I would like to express my profound gratitude to all our shareholders for joining our earnings call. Before getting into the details about our performance, I want to inform you that starting from this session, the earnings presentation will be conducted through webcast. Since our listing on [ cost ] market in February this year, APR has consistently sought to enhance communications with our shareholders and investors. Therefore, to provide transparent communications regarding our company's current status and future we have decided to conduct our earnings presentation through webcast. Today's presentations will proceed in Korea first and followed by English. Lastly, Q&A session will begin after English interpretation.

[Foreign Language]

Before getting into the presentation, the information included in this presentation material is prepared and provided for the convenience of shareholders and investors. So the financial informations and data have not yet been audited from the external auditors and may cause some modifications during the final audit. Once again, English interpretations will begin after Korea interpretations. Thank you for your patience.

[Foreign Language]

I may start the presentation by announcing our financial performance for the third quarter 2024. You may refer to Page 3. Once again, APR achieved a new highest quarterly revenue by recording sales of KRW 174 billion, surpassing the previous record achieved in the second quarter this year. As you may know, the fourth quarter has traditionally been our peak season and consistently driving the strongest annual revenue growth. Not only the fourth quarter, but other quarters are also continuously reporting Y-o-Y growth. Additionally, our sustained success this quarter has been made possible by the continued efforts of all our employees. As a result, we have achieved continuous Y-o-Y growth for the 39 consecutive quarters since the establishment of the company in 2014. The following page, we will provide a more detailed overview of our performance in third quarter. It's Page 4, third quarter results. APR the recorded sales of KRW 174 billion, resulting in Y-o-Y growth of 43%. Both Beauty Device and cosmetic divisions have achieved overwhelming growth, followed by the sales of KRW 75 billion and KRW 85 billion, respectively. And also Y-o-Y growth of 62% and 54%, respectively. Operating profit was KRW 27 billion, a 25% growth in Y-o-Y. We have recorded 15.7% for the OP margin, which is a 2.3% point decrease relative to the third quarter 2023. We were undergoing a temporary decrease in the OP margins due to the increase in transportation expenses to secure the optimum inventory level for the preparation of the peak season fourth quarter. Additionally, there has been a drastic fluctuations in the exchange rate for the overseas inventories during the adjustment of the unrealized P&L. However, it's occurred from -- however, it's not occurred from the actual operating activities, but done based on our accounting treatment. So it is anticipated that the adjustment will be executed after the fourth quarter. Now it's Page 5, third quarter results by divisions. Beauty Device division recorded a sales of KRW 75 billion, resulting in Y-o-Y growth of 62%. And also, I would like to highlight that the device division has achieved its highest quarterly sales by selling over 300,000 devices within third quarter, especially, there has been a distinctive sales growth for the devices in all overseas regions. We offered various options for the Beauty Devices by introducing and launching new items such as Booster Pro, Pink Editions and High Focus Shot for the domestic customers and Ultra Tune for the overseas customers. Starting from Hong Kong global launch for the RF device, UltraTune will begin and expect for the additional sales growth for the coming period. Moving on to the cosmetic divisions. The cosmetics division recorded sales of KRW 85 billion, resulting in Y-o-Y growth of 54%. We are making distinctive and noticeable results in the cosmetic divisions, especially for the Medicube brand. The rapid growth on Medicube is not only limited to domestic region, but global regions, especially in U.S. and Japan. There has been a solid growth in cosmetic sales across the best-selling items. Additionally, we have enhanced our product competitiveness by increasing the product lineup, such as PDR and cosmetics. As a result, Medicube recorded sales of KRW 67 billion, a steep growth of 73% -- Y-o-Y growth of 73%. The APR's gain is growing through Korea and U.S.-centric strategies, resulting in Y-o-Y growth of 3 consecutive quarters. GLAM.D Bio experienced a sales growth in Hong Kong, not only for the health supplement nor enzymes, but also for the massagers. Other divisions, including the fashion brand NERDY experienced a sales reduction due to the economic slowdown in China. Next is the sales by regions. Please refer to Page 6. The third quarter results saw rapid growth in overseas sales, recording Y-o-Y growth of 79%. And surpassing over KRW 100 billion for the first time. U.S. centric growth led to the steep growth in overseas sales and overtaken the domestic sales. As of now, overseas sales accounts for about 58% of the total sales. I will move on to the next page to deliver more detailed information of our regional performance. There has been a steep growth in overseas regions, especially in U.S., Japan and Hong Kong, which allow us to achieve another record high quarterly sales. This performance was achieved through the transition of current K-beauty consumers to the general cosmetic consumers by executing the channel expansion strategies. Coming back to the domestic performance, we recorded sales of KRW 74 billion, resulting in Y-o-Y growth of 12%. Major sales upside driver was the nice university promotions and launch of new device High Focus Shot. For U.S. We've established a new quarterly sales record of KRW 40 billion, resulting in Y-o-Y growth of 123%. Continuous high growth of 94% in Beauty Device and 146% for cosmetics. Along with U.S., Japan also established new record high for the quarterly sales by recording KRW 15 billion with Y-o-Y growth of 79%. Breaking down into beauty devices and cosmetics, they recorded a Y-o-Y growth of 68% and 136%, respectively. Due to the economic slowdown in China, Fashion brand nerdy undergone sales reductions of KRW 7 billion, led to the decrease in overall sales. In Hong Kong, by successfully establishing high brand awareness, we've recorded sales of KRW 16 billion, resulting in continuous high Y-o-Y growth of 93%. Other regions recorded sales of KRW 24 billion along with Y-o-Y growth of 184%. Accelerations of global expansion allowed us to expand our global market to Europe such as U.K., Denmark and Romania. Also, both channel diversification and global expansion allowed us to broaden our business capabilities to B2B channel and new markets such as Europe. As a result, both B2B and B2C channel sales are experiencing growth. Next page is prepared to explain more details about transportation expenses. With sustained global sales growth, we are seeing continuous quarterly increases in exports, from our headquarters in Korea to overseas subsidiaries and B2B partners. The export volume spike in third quarter reflected both local sales growth and all these shipments to meet peak season demand. As a result, transportation expense proportion has increased from 7.4% to 9.5%. But this number is a onetime expense and projected to be normalized in the fourth quarter as it is reflected in advance to the third quarter. Please refer to Page 9. Now I would like to address the sales trends of our main business divisions, Beauty Devices and Cosmetics. Despite the fact that the third quarter is an all-season period, both device and cosmetic break a new quarterly sales record. As shown in the diagram, Beauty Device division has been growing continuously since 2021. We Also, there has been a sales spike during the peak season in every fourth quarter. Considering this circumstance and recent market response, we are expecting that this trend will continue through this fourth quarter. Following this peak season, we have successfully prepared to ensure that our secured, inventory stock translates into sales. In the cosmetic division, while our focus in 2023 was largely on the device business, we have strengthened our competitiveness in 2024 by expanding human resources and accelerating global expansion. As shown on the right chart, the growth rate for cosmetic increased sharply recording the sales of KRW 222 billion, exceeding the entire 2023 annual sales of KRW 214 billion by 4%, marking a significant achievement in our cosmetic businesses. And next page, financial statement summary on Page 10. This is a summary of our consolidated financial statements. You may refer to this page at your convenience. Thank you for listening, and this is the end of the presentation. We may move on to the Q&A session. Thank you.

[Operator Instructions]. The first question will be provided by [indiscernible] Investment and Securities.

[Foreign Language] [Interpreted] I have 3 questions. First, in third quarter, shipping cost percentage of sales have increased. I'm curious if this is due to a general rise in international shipping rates or if it's because of our overseas shipment volume has increased. Could you provide detailed insights on which factors are contributing to this increase?

First of all, most of the transportation expenses for this quarter, the increment the highest portion takes from -- from the shipment to the overseas regions and Oman is around KRW 4 billion. And regarding the transportation expenses, there are several factors that affect the increment on our transportation expense. One of the example is that there has been some increments for the shipments and relating to the increment of the payment for the tariffs. And another factor is that -- and often in -- there has been some duties for us to meet up some the logistics, the schedules and to meet up the schedules, we have to utilize more the shipments using the airplanes. And also, there has been some increments in the other logistics-related fees.

[Foreign Language] [Interpreted] Secondly, in device category. So I'd like to know the sales volume for Ultra Tune and High Focus, which launched in September. I feel the sales might be somewhat weaker than expected.

Regarding the sales trend for the beauty devices in the third quarter, I've mentioned that we've sold around over 330,000 devices and from that number around 120,000 are from domestic and the rest, 210,000 is from the overseas. And from that number, around 60% is from Booster Pro and the rest 40% is from Ultra tune and High Focus Shot. And regarding the sales trend for the newly launched devices, Ultra Tune and High Focus Shot we are seeing that the speed of the sales are going at the optimum pace. And also for the global launch of ultratune it's completed for the launch in Hong Kong and U.S. And we will be able to launch Ultra Tune in Japan in a coming period. And there are some reasons behind the delays of the global launch in countries like Hong Kong and U.S. And the reasons are, it requires some additional time for us to acquire some related approvals relating to the sales in the local regions.

[Foreign Language] [Interpreted] Last question is for Cosmetics. I'd like to know if there are any plans to enhance cosmetics segments such as launching Sunscreen product in the future.

Regarding the product launch for -- I mean, the product launch for the new products, as you can see from the third quarter, the big promotion events such as mega [indiscernible] other events, you can often observe that APR is increasing its brand awareness in several the cosmetic categories such as NPLs or serums or pets. In that sense, our business strategies relating to the cosmetics will be will be same as our original strategies that we've planned in the early of this year. And in that sense, we can also consider launching the new product categories such as sunscreen as well. Next question, please.

[Foreign Language] The following question will be presented by Yu-jung Han from Hanwha Investment & Securities.

[Foreign Language] [Interpreted] First, how much of the adjustment to COGS was reflected in third quarter? And what amount is expected to be reversed in the first quarter?

Regarding the COGS for the impact of the COGS by the fluctuations of the exchange rate, normally APR make modifications on the inventory level from the early of the month to the end of the month. And during these processes, the exchange fluctuation often impact on our the expenses level. And because of that, there has been some modifications of -- regarding on our -- the cost of goods stored COGS and 1 billion.

[Foreign Language] [Interpreted] Secondly, what are the plans for launching new device product next year? And what are the current data on inventory turnover?

Regarding the device -- the product launch plan for the BD devices for the coming year we are preparing for the product launch for the coming year, but for today's earnings call, it's quite hard for us to deliver some detailed information, but we will be able to deliver more detailed information in the start of the next year, 2025. And regarding the safety inventory turnover period, our -- the inventory level has been increasing, starting from August to September. And the inventories has been delivered to our -- the warehouse starting from October this year. And in that sense, as of now, we have enough safety inventory level as of now. And one of the major reasons for that is because at early of this year, we had to go through some of the supply shortages in the short-term basis and take that as a lesson, we have prepared some enough safety inventory levels. Next question, please.

[Foreign Language] [Interpreted] The following question will be presented by Hyunjin Park from Shinhan Securities.

[Foreign Language] [Interpreted] You mentioned that the increase in shipping costs was the main reason for the operating profit margin falling below consensus. Could you explain if the opening of the new Pyeongtaek plant have significantly contributed to this particularly in terms of increased labor cost and depreciation expense.

It is true that we've been running the 2 production facilities in Korea, but -- and in that sense, actually, the number of the labors relating to the factories are actually increasing trend. But the actual -- the expenses relating to the labor cost is not as high as our actual sales growth. So the impact is actually very minimal. And also in the same concept, the depreciation cost is also not impacting as much on our operating profit.

[Foreign Language] [Interpreted] What is the current utilization rate of the Pyeongtaek plant?

Normally, as of now, our -- the monthly sales -- the average monthly sales for the beauty devices is around 130,000 to 140,000 devices -- but this number actually temporarily increases during the peak season in the fourth quarter, especially during the Black Friday promotion period. And as of now, our -- the production facilities are producing our products corresponding to the -- to this kind of promotion events. So as of now, we are planning to produce around 150,000 devices per month.

[Foreign Language] [Interpreted] How much capacity investment is planned for the future?

[Interpreted] For the investment regarding the investment plan, there will be some -- the CapEx relating to the medical devices and also some facilities relating to our R&D center. And -- as of now, actually, our home use beauty devices are produced heavily on our -- the second production facilities located in Pyeongtaek. And as of now, our second -- the utilization rate, the production rate for the second factory is ongoing trend without any difficulties or problems -- and as of now, we don't have any -- at least in the first term, we don't have any plans to increase or establish additional other production facilities for the beauty devices.

[Foreign Language] [Interpreted] Could you provide a breakdown of the proportion of overseas sales for the cosmetic segment? If it's difficult, could you give operation profit margin?

So the difference of the operating profit within the cosmetics and Beauty Devices, I think I can deliver some kind of a trend based on the trend. Normally, our beauty device divisions have slightly higher OP margins relative to the cosmetics. And also, as you know, that we have several cosmetic brands within our brand universe. So the OP margin differs by the each brand. But within the Medicube brand, still BD device division has slightly higher OP margins than the Medicube Cosmetics.

[Foreign Language] [Interpreted] What is the proportion of overseas sales in the cosmetic segment?

The overseas, the sales proportion for cosmetics, the overseas takes about 60% from the total cosmetic sales and the domestic is around 40%.

[Foreign Language] [Interpreted] Lastly, regarding impact of Trump's tariff policy, what will be the impact of potential future changes?

Regarding the tariff policies that has been announced by Trump, the U.S. Trump still the tariff rate for the beauty device and cosmetics are relatively low, but still somewhat, it is true that we have to apply certain portions to our COGS. And also as of now, we are not -- as of now, we are preparing to conduct some initiatives regarding the policy tariff policies that has been announced by the Trump.

[Foreign Language] [Interpreted] The following question will be provided by Heejin Lim from Citi.

[Foreign Language] [Interpreted] [indiscernible] how significant was this increase?

Now originally, I've mentioned that our -- the transportation expense was around KRW 4 billion. And from that number, the question was how much the air shipment takes -- the portion is -- and regarding that, the inquiries, the air shipment was -- it took about KRW 2 billion -- a little over KRW 2 billion. But more of the breakdown of these transportation expenses regarding the air shipment we need to break down some more expenses. So maybe we will be able to deliver some more detailed information afterwards.

[Foreign Language] [Interpreted] Could you provide insight into the sales, which related of PDRN and medical device?

Regarding the PDRN business sector, we've been continuously provided that we are under construction for the third factory, which is specialized in producing and extracting the raw materials, PDRN and also PDRN related, the cosmetics and beauty devices. And in that sense, the construction will be completed in the end of November this year. And this construction -- the completion of the construction includes the installation of the equipment and et cetera. So the extractions of the raw materials and also the production of the completed cosmetics will be started starting from the early of next year. And about the beauty of medical devices, it normally takes at least 1 year since the completions of the constructions of the factories. So we are expecting that at least, it will take -- at least we'll be able to deliver our medical devices -- introduce our medical devices, starting from end of 2025 or the early of 2026. But our R&D team and also any human-related human resources are already fully settled within our R&D center. And the time schedules and the plant schedules has been the progress is on track right now.

[Foreign Language] [Interpreted] There was an unrealized inventory adjustment of KRW 1 billion in COGS and the cost ratio appears to be 24%, which is higher than this year. Is this due to the normalization process following the sales of new equipment?

[Interpreted] Regarding these inquiries actually excluding some the adjustment about the unrealized P&L, I think we can -- I can conclude that there are 3 more reasons relating to these inquiries. First is that, as you may know, that our fashion and apparel division NERDY is still recording the operating loss, and that's the first reason. And second reason is that we had to apply some additional inventory allowance for the inventories for the NERDY. And thirdly, the last reason is that there has been some modifications for the COGS because of the sales mix. So as you know, starting from the second half this year, we've broadened -- I mean, we've diversified our sales channel from B2C to the other online channels such as Amazon or TikTok shop. So that's also one of the reasons as well.

[Foreign Language]

[Interpreted] Once again, I would like to express my profound gratitude to all shareholders for joining our earnings call, and every 1 of us in APR will continue to strive for sustained growth through constant and endless efforts. We kindly ask for your continued interest, encouragement and support. Thank you for listening, and this is the end of the earnings presentation for the third quarter of 2024. Thank you.