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Greetings, and welcome to the Inter Parfums' First Quarter 2019 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Russell Greenberg, Executive Vice President and CFO. Thank you, sir. You may begin.
Thank you, operator. Good morning, and welcome to our 2019 First Quarter Conference Call. We will follow our regular format. I will start the call with a discussion of our financial results and then Jean Madar, our Chairman and CEO, will provide an overview of our business and share some of our plans for the future. Then we will take your questions.
Before proceeding further, I just want to remind listeners that 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, but 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 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, Inter Parfums 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.
As I review our first quarter, please keep in mind that the dollar/euro exchange rate was 1.14 compared to 1.23 in the first quarter of 2018. In general, our reported net sales are impacted by changes in foreign currency exchange rates. A strong U.S. dollar has a negative impact on our sales, but a positive effect on our gross profit margin.
And the reason for that is because over 45% of the net sales of our European operations are actually denominated in dollars, while almost all costs of our European operations are incurred in euro.
With regard to the current first quarter compared to last year's first quarter, net sales were $178.2 million, up 3.8% from $171.8 million. At comparable foreign currency exchange rates, net sales actually increased to 7.4%. Sales by European-based operations declined 3.8% to $143.7 million from $149.5 million.
Sales by U.S.-based operations rose 54.8% to $34.5 million from $22.3 million.
Gross margin was 61.6% of net sales compared to 61.5% of net sales in the prior first quarter.
SG&A expenses as a percentage of net sales were 42.9% compared to 43.8%.
Operating income increased 9.5% to $33.3 million from $30.4 million. Operating margin was 18.7% compared to 17.7%.
Our effective income tax rate was 27.4% compared to 30.5%. Net income attributable to Inter Parfums increased -- increased to $18.9 million, up 18.8% from $15.9 million and net income attributable to Inter Parfums, Inc. per diluted share rose 17.6% to $0.60 from $0.51 in last year's first quarter.
In our press releases, as we've already discussed the major contributors to our sales growth, namely the Montblanc, Jimmy Choo and GUESS brands, I'm going to move on to profitability inputs.
Gross margin for European operations was 63.2% in the current first quarter compared to 63.0% in the same period last year.
Offsetting the gross margin benefit that we saw attributable to the stronger average dollar/euro exchange rate were higher than typical costs that were associated with the production of our Montblanc Explorer, which launched in the first quarter of 2019.
For U.S. operations, gross profit margin was 55.1% and 51.4% in the first quarters of 2019 and '18, respectively.
Increasing sales of higher margin Prestige products under license have had a profound impact on the profitability of our U.S. operations.
In addition to a slight increase in overall gross margin, our operating margin has benefited from SG&A operating leverage that accompanies increased sales.
As I just noted, consolidated SG&A expense was 42.9% of net sales compared to 43.8% in last year's first quarter.
For European operations, SG&A expenses declined 4.4% on a 3.8% drop in net sales and represented 42.5% of sales in 2019 as compared to 42.8% of net sales in last year's first quarter.
For U.S. operations, with sales up 54.8%, SG&A expense increased only 36.5% in 2019. And it represented 44.7% and 50.8% of first quarter net sales in 2019 and '18, respectively.
Promotion and advertising, which is included in SG&A expenses aggregated 15.4% of net sales of 2019 period, slightly less than the 15.6% in last year's first quarter. 21% remains our 2019 full year target for promotion and advertising as a percentage of sales.
The only significant nonoperating item that impacted the bottom line was the reduction in the corporate income tax rates in both the United States as well as in France.
Our financial position remains extremely strong. We entered the second quarter with working capital of $387 million, including approximately $228 million in cash, cash equivalents and short-term investments.
With the working capital ratio of over 3.1:1 and only $39.6 million of long-term debt, including current maturities.
As we announced last month, we are looking for 2019 net sales to come in around $712 million, resulting in net income attributable to Inter Parfums per diluted share of $1.88.
As always guidance assumes that the dollar remains at current levels.
Jean, please continue
Thank you, Russ, and good morning to you all. As we reported, we achieved sales growth in our 2 largest markets with comparable quarter sales growth of 8.5% and 12.7% in North America and Western Europe. The Middle East performed also well with first quarter sales growth of 22.9%., but our 3rd largest market, Asia did stand at 9.3% comparable quarter decline, primarily due to lower sales of Lanvin products. However, we expect better comparisons for Asia in the coming quarters with the launches of Lanvin, A Girl in Capri and Anna Sui, Fantasia Mermaid, a new fragrance.
On our last conference call, I noted that we're in a very good position with respect to Asia, and we continue to expect growth in the region for 2019.
Our third Montblanc pillar, Montblanc Explorer was our major first quarter launch and factored permanently into a 9.9% increase in brand sales. The global rollout is still underway, so we expect favorable comparisons for the brand in the second quarter.
I'm also pleased to report that we do not see any material cannibalization resulting from these new entrants because we've been very careful to develop end market products we're clear on whenever we replace sales.
We look for Montblanc to be our biggest percentage gainer in 2019.
Jimmy Choo fragrance sales rose 25.7% in the first quarter, which was attributable to the brand legacy fragrance as well as the introduction of Jimmy Choo Floral flanker. But more importantly, was due to the less enduring appeal of the brand's men's and women's fragrance collections.
Later in the year, we have a new men's line debuting for the Jimmy Choo brand, along with new interpretations of Jimmy Choo Blossom, Illicit and L'Eau. In 2020, we will have a new women's pillar in the works. We plan to interpret beauty that now with lipstick and nail polishes for Jimmy Choo.
2019 is a year of consolidation for Coach following last year's 73% sales growth. For Coach, we are relying on established scents and the introduction of second floral flanker to sustain brand sales in 2019 as we have prepared -- as we prepare for major women's fragrance launch in 2020.
A Girl in Capri is our new Lanvin scents and this will debut in this month. And for Rochas, Moustache our first collection from men's is currently rolling out. Also, we introduced a limited edition summer scent for the Rochas brand and our third interpretation of the Rochas Mademoiselle line Couture is also unveiling.
We are working on an entirely new of Rochas women's scent, which may be due late this year or in early 2020.
With regard to U.S.-based products, for GUESS, we are expanding existing pillars starting with 1981 Los Angeles where domestic distribution of the duo fragrance will begin later this spring, followed by international rollout in the fall.
Throughout year end, a product called Seductive Noir, which is also a brand extension duo men's and women's fragrance will begin domestic rollout with international distribution coming next year. And for 2020, we are developing a new upscale blockbuster women's scents for GUESS, and we are anticipating a spring release.
Regarding Anna Sui, Fantasia Mermaid debuted last month, and we are very pleased with its performance so far. We have a number of over flankers for the brand unveiling called Sui Dreams and Serenity Wish with distribution for this throughout Asia. In 2020, Anna Sui brand has a major launch planned for the new fragrance family called Sky.
Regarding Oscar de la Renta, we have added Bella Rosa to the Bella Blanca family, which accomplished for much of our first quarter sales gain and the Bella Essence will join the fragrance family from next year.
Let me bring you up-to-date on Dunhill because we have moved the sales up since our last conference call for building, our new fourth scent signature collection debuted at Harrods in April with a global rollout beginning this quarter.
We also have a product called Century Blue, a flanker for Century line debuting this year. For Abercrombie & Fitch, our new duo called Authentic just launched at U.K. duty-free stores in April and now global distribution is underway.
We also expanded the [ Eau de ] Abercrombie & Fitch fragrance family with a flanker called First Instinct this year. With regard to our newest brand, we are far along in the creation of a women's multi-scent collection for Graff. It still looks like late 2019 for initial launch and the Lily Aldridge program is also moving forward and I account that we'll anticipate that the first scent, which is to be sold exclusively via e-commerce will debut this September.
As I noted, in addition to the 2 new men's scent for Montblanc, and Jimmy Choo, we are relying on the strength of legacy fragrances and brand extension and flankers to fuel our anticipated 2019 sales growth. So now operator, you can open the floor for questions.
[Operator Instructions] Our first question is coming from Joe Altobello of Raymond James.
I just -- first I want to started on the overhead leverage and Russ, you mentioned this earlier, pretty impressive in the quarter, and it sounds like a lot of that was on the U.S. side. So I'm curious how sustainable is that given I would imagine you guys are not expecting 55% top line growth for that segment going forward particularly as you lap GUESS?
No, certainly, nobody is expecting to continue to grow at that level. The GUESS license began in Q2 of 2018. So this was really the last quarter that had a relatively simple comparison from a sales standpoint. However, the level of the operating margins that were achieved are somewhat sustainable. The reality is that when you have such a large increase in sales, you are gaining a tremendous amount of leverage of the SG&A expenses. So the type of levels that we're seeing are sustainable for the future, meaning we don't have to add a lot of SG&A expense to support the current sales levels that we're at. So as we continue to report sales similar levels or increases, we should be able to continue to gain a little bit on the operating leverage from the U.S. operations.
Okay. That's helpful. And if I could just follow-up, any early insights into the Abercrombie Authentic launch, how receptive have retailers been to that, thus far?
We made all our presentations, and we are largely shipping the products to most of the markets. The reaction has been quite good because the product is very coherent with the image of Abercrombie and the juice for men and for women has been very well accepted. We knew that because we did some consumer test before launching. So we're expecting some strong sales from Abercrombie from Authentic this year.
Our next question is coming from Stephanie Wissink of Jeffries.
This is Ashley Helgans on for Stephanie Wissink. We wanted to unpack for summers between department stores and specialty multi. And then is there any other new distribution we should be aware of?
I didn't quite get that. Can you repeat that, please.
Yes, we wanted to unpack the channel performance between department stores and specialty multi? And then just a follow up, is there any new distribution that we should be aware of?
There is no new distribution to say. We continue to sell our products independent -- in Europe, it's mostly independent perfumeries or chain of perfumeries, such as Sephora or [ Bloomingdales ]. In the U.S., it's mostly department stores, and also Sephora, and the largest account being Macy's. And in Asia, it's a mix of department store and, of course, e-commerce because e-commerce is part of our Asian business is growing at a very fast pace. Just finished a meeting with our distributor in China and we get 20% of our business in China in terms through e-commerce. That's what I can tell you.
Our next question is coming from Hamed Khorsand of BWS Financial.
So Russ, I guess, this question is for you. What's changed in the business significantly because the message you're sending on this call something that brought up in the past, and in the past, you've talked about the operating leverage still being far away. But today, it's the focus point of today's call. So what's dramatically changed that this message is what you're trying to project today?
Well, I think it's very clear that the signing of the GUESS license last year. When you have a brand, that's going to bring somewhere close to $50 million to an existing business that was running little bit under the $100 million. Clearly, it's a little bit of a game changer from a profitability standpoint. In our business and our operations, there's a lot of variable expenses. The fixed expenses, which is primarily salary-related and infrastructure, is something that is very leverageable. So when you take a brand and you can increase your sales by $20 million or $30 million or $40 million over a relatively short period of time, you're going to be able to expand that operating margin. And that's exactly what we've seen here in the first quarter. If you look at some of the details, we did file our quarterly report, and you can see that from the U.S. operations, we will practically at a breakeven in last year's first quarter, which is usually a very mild quarter. But here, with sales increasing 54%, the U.S. operations generated closer to $3 million in profits let alone operating leverage. So that's where we see the future. At this point in time, we don't have to add a lot of money to our infrastructure and the increase in sales is going to support a further expansion of our operating margins.
And can you get current infrastructure handle any expansion as far as the portfolio is concerned?
Absolutely. We are constantly evaluating and looking at other opportunities on both sides of the Atlantic. It's not just the U.S. operations. We're doing the same thing in the European side of our business. We absolutely can add additional brands, additional licenses to our portfolio with a minor or relatively small increase in the SG&A expenses.
Okay. And then any plans to expand Rochas's market exposure this year?
I think we've started to do that, not just this year, but even last year. Rochas was primarily a brand that was sold in Western Europe, primarily for Spain and France. We've moved it out into about 9 to 10 other jurisdictions throughout Western Europe. And I think that plan will continue as time goes on.
At this time, I would like to turn the floor back over to management for any additional or closing comments.
Okay. Thank you, and thank you all for being on the call. Thank you for your questions. Just before signing off, I would like you to know that on May 13, just next week, I will be presenting at the Citi Consumer Staples Access day in New York and on May 30, I will be at the D.A. Davidson Consumer Conference in Chicago. And then, of course, on June 19, I will be at the Jefferies Consumer Conference in Nantucket. Thank you for tuning in to our conference call and as always, if you have further questions, please contact me in my office. Have a great day, and thank you, once again.
Thank you very much.
Ladies and gentlemen, thank you for your participation. This concludes today's conference. You may disconnect your lines at this time, and have a wonderful day.