Inter Parfums Inc
NASDAQ:IPAR

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Inter Parfums Inc
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Price: 131.435 USD 2.52% Market Closed
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Earnings Call Transcript

Earnings Call Transcript
2018-Q2

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Operator

Ladies and gentlemen, greetings, and welcome to the Inter Parfums Second Quarter 2018 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.It is now my pleasure to introduce your host, Russ Greenberg, CFO and Executive Vice President. Thank you. You may begin.

R
Russell Greenberg
executive

Thank you, operator, and good morning. Welcome to our 2018 second quarter conference call. As usual, I will start the call with a financial overview and then Jean Madar, our Chairman and CEO, will discuss our current business, recent developments and some of our upcoming plans. After that, we will take your questions.Before proceeding further, I 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, Interparfums 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.Summarizing second quarter performance. Net sales were $149.4 million, up 15.7% from $129.1 million. At comparable foreign currency exchange rates, net sales increased 12.3%. Net sales by European-based operations rose 8.3% to $115.6 million from $106.7 million. And net sales by U.S.-based operations rose 50.8% to $33.8 million as compared to $22.4 million. Gross margin was 64% compared to 65%. SG&A expenses as a percentage of net sales were 51.5% compared to 53.8%. Operating income increased 29.7% to $18.8 million from $14.5 million. Operating margin rose to 12.6% as compared to 11.2%. The effective income tax rate was 30.2% compared to 33.4%. Net income attributable to Inter Parfums Inc. increased 61.6% to $10.9 million from $6.7 million. And net income attributable to Inter Parfums Inc. per diluted share rose 59.1% to $0.35 per share, up from $0.22.As we reported yesterday, during the 2018 second quarter, the average U.S. dollar to euro exchange rate increased 8% to 1.19 as compared to 1.10 in the second quarter of 2017. And as a result, had much less of an impact on our sales and gross profit margin from our European-based operations than in the 2018 first quarter when the average U.S. dollar-euro exchange rate increased 16%.For the second quarter, gross profit margin for European operations was 68.1%, down slightly from 68.5% in the prior year's second quarter. Gross margin for U.S. operations was 50.2%, up from 48.5% in the corresponding period last year, and that was due to increased sales of higher-margin Prestige products under license.In the second quarter, SG&A grew at a slower rate than sales, which contributed to the substantial increase in operating income and operating margin. That said, we continue to invest heavily in promotional spending to support new product launches and maintain the sales momentum of our consistent star performers as well as build brand awareness. Promotion and advertising included in SG&A expense aggregated $32.5 million and represented 22% of net sales in the current second quarter as compared to $30.4 million or 24% of net sales in the second quarter of 2017.We have significant promotion and advertising programs that are planned for the balance of 2018, and we continue to expect promotion and advertising expense to approximate 21% of 2018 full year net sales, the same percent as we had in 2017.Two nonoperating items supplemented our excellent second quarter operating performance. We had $1.5 million gain on foreign currency in the second quarter as compared to a $0.8 million loss on foreign currency in the second quarter of 2017. And our effective tax rate was 30% in the current second quarter, and that's compared to 33% in last year's second quarter.Our financial position is as strong as ever. We closed the second quarter with working capital of $372 million, including approximately $223 million in cash, cash equivalents and short-term investments and have a working capital ratio of almost 3.2:1. You may have noticed that inventory levels are up approximately 26% from the year-end, and this reflects the inventory levels needed to support second half sales expectations, which include a variety of new product launches plus, of course, GUESS? component parts and finished goods that we purchased from the former GUESS? licensee.As we reported, we are on track to achieve our goals for 2018, which call for net sales of approximately $665 million and net income per diluted share attributable to Inter Parfums Inc. to come in at around $1.59 per share. Of course, guidance assumes that the dollar remains at current levels.Jean, please continue.

J
Jean Madar
executive

Thank you, Russ, and good morning, everyone.By every measure, the second quarter of 2018 was a terrific one. I'm especially pleased that across the worldwide map, we're doing more and more business. Regions that not so long ago were anemic are now blossoming.As we reported yesterday, that through the first half of the year our 3 largest markets, North America, Western Europe and Asia achieved sales growth of 18%, 9% and 31%, respectively, compared to the first half of 2017. Similarly, our next 3 markets ranked by size, the Middle East, Central and South America and Eastern Europe have grown sales by 22%, 13% and 24% for the same 6-month period. While things can change, at present, we do not see any headwinds facing these positive trends.Moving on to our new license, GUESS?, let me bring you up to date. The infrastructure of our GUESS? business has taken shape, having received components from the former licensee. We're producing -- we're starting to produce and we're starting to sell finished goods. We plan to be in stock with our own components in the next 2 or 3 coming months. We are geared up for the Christmas season with major shipments planned for September and October. In terms of advertising and promotion, most of our efforts are focused on 2 existing scents. The first one is 1981 and the recent brand extension 1981 Indigo, which both come in women's and men's version. At the same time, we have a major blockbuster planned for 2020, and we are working on additional flankers for 2019. Our worldwide distributor network is quite enthusiastic about GUESS? as they view it as a great American brand with huge recognition outside of the U.S. Much of our efforts are focused on Eastern and Western Europe and, of course, Asia. As I mentioned on our last conference call, Russia is going to be a big market for GUESS? where the brand is highly desirable and new GUESS? stores are being opened. Our goal is to be a top 10 fragrance in Russia in about 2 years from today. Asia is another big opportunity for the fragrance where the brand has strong recognition, especially in China.Turning to the second half of the year, we have a number of new product launches and rollouts in the works. From European operations, we have Jimmy Choo Fever, which debuted in France in July and is scheduled to be on U.S. shelves beginning in September. Also last month, in July, we unveiled Éclat d'Arpège for Lanvin. And come September, we have Coach Platinum launching as a new flanker for Coach for Men, which, by the way, won first prize in June at the annual Fragrance Foundation award in the Consumer's Choice category. Moving along, in October, Moustache, our first new scent for men under the Rochas label will debut. For U.S. operations, we're introducing a new fragrance for Anna Sui, a new flanker for Anna Sui. We have also a new pillar for Dunhill called Century. Century was sold exclusively at Harrods and Dubai Duty Free last month, and the global rollout is now underway. Also this summer, Abercrombie & Fitch add First Instinct Blue for women to its fragrance portfolio. And for Hollister, we have an entirely new fragrance duo called Festival Vibes that will come to the market.Although plans are still not entirely finalized, let me share with you our current thinking for next year. Next year will be a very important year, we have a new men's fragrance in the works for Montblanc and Dunhill for women. We have plans to launch a new line for Lanvin, Coach, Rochas and Anna Sui. With respect to our newer brands, we expect to have a multi-scent collection for Graff, launching towards the end of the year. And as I just mentioned, Guess 1981 brand extension. We will have more to say about 2019 on our next conference call.On our last conference call, I stated that Coach has the potential to be as large as Montblanc, with a Coach advantage of having a strong business for women as well as men. Well, as of mid-year, Coach became our third-largest brand. Just a reminder, the Coach business has been entirely homegrown.Let me close my formal presentation, before I take your questions, by quoting one of our analysts who wrote the following in a recent research note that Russ and I couldn't agree more. "IPAR is perpetual compounder of value. We see IPAR as a consistent compounder. And despite periods of variability in core brands performance, the company maintains a well balanced portfolio of fragrance brands. While large-scale brands generate significant attention within the fragrance licensing sector, IPAR has excelled at identifying underleveraged brands and scaling them to $50 million to $100 million fragrance business. We expect the company to further enhance its portfolio over the next 1 or 2 years with strategic licenses and brand acquisitions." Of course, we cannot assure you that any future license or brands will be acquired.So now, operator, you can open the lines for the question.

Operator

[Operator Instructions] Our first question comes from the line of Linda Bolton-Weiser from D. A. Davidson.

L
Linda Bolton-Weiser
analyst

So congratulations on strong profitability. So the gross margin, even though it was down year-over-year, it was down less than in the first quarter. So I assume that was due to the FX situation. And so can we assume that as the euro is -- it's not as strong year-over-year in the next few quarters that your gross margin should continue to kind of improve? Maybe you could comment on that.

J
Jean Madar
executive

Russ? Thank you, Linda, for the question.Hello?

R
Russell Greenberg
executive

I'm sorry. Thank you, Linda, I appreciate that question. The average exchange rate right now is hovering right around the 1.16, 1.17, which is very, very close to where we were throughout the second quarter. So correct, I really don't expect to see any significant fluctuations with respect to gross margin, so long as this exchange rate stays at current levels.

J
Jean Madar
executive

Okay.

L
Linda Bolton-Weiser
analyst

And then given the strength of your profitability in the quarter, I guess it's a little surprising that you didn't feel the need to raise the EPS guidance for the year. So I would assume that's because some of your A&P spending then is going to be second half-weighted. Can you just give a little color on some of your plans there? And is it more fourth quarter-weighted, where you're really going to try to drive demand during the holiday season with advertising and promotion?

J
Jean Madar
executive

I don't -- Russ, you want to...

R
Russell Greenberg
executive

Yes, I don't have a problem with...

J
Jean Madar
executive

EPS. I mean -- go ahead, Russ, then I will complete your answer.

R
Russell Greenberg
executive

Not a problem. The -- a lot of the benefit from a comparison standpoint of second quarter versus last year. There are a few pennies that did result as a factor of the nonoperating changes with respect to a gain on foreign currency and, of course, the tax rate. The tax rate has been projected, and it'll probably be consistent throughout the remainder of this year. So as of right now, the EPS for the year is pretty much right on target with what we're expecting. From an advertising and promotions standpoint, it was a little bit light in the second quarter as compared to the prior year. As a matter of fact, it was down 2 percentage points. We spent about 22% of sales this year's second quarter versus 24% last year's second quarter. Because we've indicated that we're going -- we expect to end up at around 21% in total for the year. Clearly the second half is going to be heavily weighted with advertising. And that usually is far more concentrated in the fourth quarter than it is in the third quarter. Jean, anything else to...

J
Jean Madar
executive

Yes. It's always a question, do we maintain the estimate, do we -- but what I think is important is to tell you that business is in good shape. We are already in the middle of the third quarter. We had a very good month of July. The inventory at distributor level and at store level is quite low. We are -- we have been actually rushing to produce more. We could have lost maybe some business because we didn't have enough inventory, but these are good signs. But as you know, we like to stay -- I don't want to say conservative but reasonable in terms of expectation. Business is in good shape not only in the market where it has been good for the last 2 quarters, which is Asia, but we see good business in the U.S. Our business in department stores is doing fine, while gaining market share for Jimmy Choo, for Montblanc, for Oscar de la Renta. So there is -- all our brands are doing -- are having positive results. We continue, in China, to see some extraordinary results on Anna Sui. Last time I checked, I think our business was up 50%, so it was -- it is great. And we have not opened all the doors yet so we have a lot of pocket of growth coming in third and fourth quarter. But as you know, the main -- the largest launches and the new pillars and the new blockbusters will happen in 2019.

L
Linda Bolton-Weiser
analyst

And then finally, on that last note with 2019, you listed several things. I didn't quite catch, is there a Jimmy Choo major launch planned, and what part of the year would that be in 2019, early or later in the year?

J
Jean Madar
executive

Hello?

R
Russell Greenberg
executive

Yes, Jean, I don't know if you heard that. With respect to the Jimmy Choo one, I don't think we have a set date yet.

J
Jean Madar
executive

We don't have a set date. But the big launch will be for Montblanc, which will have a very, very big launch starting -- beginning of 2019. And we will have a launch also on Lanvin. Actually, all our brands will have a blockbuster launch in 2019.

R
Russell Greenberg
executive

Yes, and I just want to add, Linda, that what Jean went through in the -- in his remarks with respect to 2019 was really just a small look into it. As you know, it won't be until mid-November that we will announce our guidance for 2019. That's when our launch schedules are pretty much set, and that's when we'll be able to let you know when the expectations are and what seasons or in what quarters we expect these different launches to take place.

Operator

Our next question comes from the line of Joe Altobello from Raymond James.

J
Joseph Altobello
analyst

Just as a follow-up on Linda's question regarding guidance for the second half, more so on the sales line. Russ, you mentioned that the ad spend is going to be fairly heavy in the second half, and that part of the inventory increase that you saw in the last couple of quarters is in anticipation of a strong second half. But your guide seems to imply a slowdown. I think in the first half, on a constant currency basis, sales were up 13%. And I guess you're looking for 8% growth in the second half, and this is despite easier compares for Jimmy Choo, easier compares for Lanvin, the continued rollout of GUESS? So is there some sort of headwind that you're expecting or are you guys just kind of preparing for the major launches that you expect in early 2019?

R
Russell Greenberg
executive

I'll start first. It's interesting that when you're comparing it with last year, you have to keep in mind that in 2018, you really don't have any blockbuster launches where you're launching any of the new pillars in connection with these brands. So when you look at the comparisons, it may appear to you that it's a simple comparison, but without a major blockbuster or a major new pillar launch, it does make the comparisons a little bit more difficult. And that's what we're looking at. We're going to maintain those advertising programs, so that we can show the kind of growth that we think -- that we're anticipating. I think the trends are likely to continue. But again, we are really looking at what our expectations are. So far, things are right along line with what the expectations are, so there was no reason to push forward and start raising guidance at this point in time. We really want to see a little bit more visibility and as the third quarter moves on, we'll evaluate at that point in time.

J
Joseph Altobello
analyst

Okay. That's helpful. And then on Rochas, I'm not sure you guys gave a number, but it looked like sales were down mid-teens this quarter. That's been a very strong brand for you in the last few quarters here, so when do we start to see the impact of the geographic expansion that you guys are contemplating for that brand?

R
Russell Greenberg
executive

Well, I think we have seen it. The key is you're -- again, we're coming off a relatively difficult comparison from that of the prior year. For the full 6 months, we were up 5% on the Rochas business. When you look at just the 3-month period, it's down approximately 4%. You're comparing again against last year where you had a major launch.

J
Jean Madar
executive

[AUDIO GAP] Rochas last year, so difficult to compare. Really 2018 is remarkable in the first 6 months, and I think the year are quite interesting. And it's really a remarkable year because without blockbusters we are able to increase sales like 10 -- 15% this quarter or -- which is quite -- it means that there is a demand for existing products. There is no cannibalization with the flankers that we are launching. So it's quite good and it's preparing ourself for 2019 where we would be more ambitious in terms of growth.

J
Joseph Altobello
analyst

Got it. And just one last one if I could. Just curious how active the market is for new licenses or trademarks. Are you getting more books coming across your desk these days?

J
Jean Madar
executive

Russ?

R
Russell Greenberg
executive

Yes. The answer to that is yes. I mean, we've been fortunate enough that so far this year we signed 2 deals. GUESS?, of course, closed, and we closed the deal with Graff. There are a couple of other opportunities that we are exploring, and we hope to be able to make additional announcements. But until any deal is signed, sealed and delivered, you won't see it within our projections and it's very difficult to discuss openly.

Operator

Our following question comes from the line of Steph Wissink from Jefferies.

S
Stephanie Schiller Wissink
analyst

Just 2 follow-ups. The first question and maybe, Jean, this is for you. It's just related to overall category innovation. We've seen some indications that retail -- that some of the newer brands coming to market with a bit more experimentation or craft is another word we heard used. Talk a little bit about maybe the category innovation beyond some of the branded and licensed goods and where that might provide opportunity for you.

J
Jean Madar
executive

As you -- we do not participate -- we don't have, today, in our portfolio, niche brands in the sense that all our brands have recognition, sometimes worldwide or sometimes a strong regional recognition. We like to take license after fashion brand or couture or jewelry. So we are not at all in the artisan work -- I mean, artisanal type of brands. I understand that they are doing well in specialty stores, but the brands that we'll be looking for in the future are brands with higher recognition from large public.

S
Stephanie Schiller Wissink
analyst

Okay. That's helpful. And then, Russ, a question for you. And I know you talked a little bit about A&P spending shifting around. But are you finding that, over the course of the last couple of years, your efficiency behind your A&P spending has actually improved? It would seem so based on the incremental margins you're generating. I'm curious if you can talk a little bit about maybe what the mix of A&P spending looks like, how that has evolved and if you're finding that some of that spend is actually generating superior returns to what you have experienced in the past.

R
Russell Greenberg
executive

I don't really see -- other than a trend of more dollars going into social media type of expenditures, the overall A&P platform for Inter Parfums has not really changed all that much. The key is, is that money is -- monies are allocated and money is spent around the world to reach the consumers that will buy our product. And as Jean has mentioned in prior conference calls, a lot of money is spent even in territories where the growth had not historically been to the level that we would have expected. You need to continue to spend money in those territories to protect your positions in those territories because without protecting those positions, you're going to watch your sales decline. So our goal is really to maintain the kind of levels that we're at, we think that by bringing it up from what used to be about 18% of our sales now to around 21% of our sales is a proper mix. We are working and tweaking the actual allocation between your consumer media and social media. But overall, I think that the level that we're at is a good level and a high enough level, so that we can maintain the positions that we have in the markets around the world.

S
Stephanie Schiller Wissink
analyst

Great. Very helpful. The last one for us is just to talk about the retail end market. Can you give us an update on retail level inventories, what you're seeing in terms of channel mix, anything that you think will be helpful as we think about the back half and then the opportunity set into 2019?

J
Jean Madar
executive

As I said before, retail level inventory is very reasonable. We just -- we started to ship Christmas gift sets in the last couple of weeks. We monitor inventory on a worldwide basis from the stores, and I can say that the level is low, which is always a good sign for us. That's my answer.

Operator

[Operator Instructions] Our next question comes from the line of Hamed Khorsand from BWS.

H
Hamed Khorsand
analyst

Just -- my first question was, could you just talk about in the second half what the sales mix would be as far as the sourcing out of your own distribution channel of network and third parties, and how that would benefit or impact your gross margin going forward.

R
Russell Greenberg
executive

So far for the first 6 months of 2018, there has not been a significant effect of the overall as a percentage of sales of product that has gone through direct distribution versus third-party distribution. Normally, you will see -- we would. If there was an effect, we would mention that as one of the reasons that gross profit margin might have increased or decreased. Usually, it's an increase because usually there's additional product that is going through that distribution network. But so far for -- as a percentage of sales for 2018, those numbers have been fairly consistent and, therefore, that has not had any significant or meaningful impact on the gross profit margin for 2018.

H
Hamed Khorsand
analyst

Okay. And then on the mix that you're seeing as far as just the shopping that you're seeing for holiday season, is that coming in mostly in the holiday sets? Or are you seeing a changeup as far as Prestige and mass market?

R
Russell Greenberg
executive

Jean, I think, if -- correct me if I'm wrong, but I think the level of gift sets that we have earmarked for distribution in 2018 is just slightly higher than that of the prior year.

J
Jean Madar
executive

On line. I will say, on line with the prior year. On line.

R
Russell Greenberg
executive

Yes. Yes, I don't think it's -- there's any significant fluctuations in that as well as a percentage of what we expect to be selling into the marketplace.

H
Hamed Khorsand
analyst

Okay. And any mix change between Prestige and mass market as far as the habit goes, what's being built up in the inventory.

R
Russell Greenberg
executive

Mass market is so insignificant as far as the overall business for Inter Parfums. At this point in time, we are probably almost in the high 90% of our business is in the Prestige market.

Operator

Ladies and gentlemen, we have no further questions in queue at this time. I'd like to turn the floor back over to management for closing.

R
Russell Greenberg
executive

Thank you very much, and thank you all for being on the conference call and thank you for tuning in. As usual, if you do have any further questions, you can contact me at my office. Have a great day. Bye.

Operator

Ladies and gentlemen, this does conclude our teleconference for today. You may now disconnect your lines at this time. Thank you for participation and have a wonderful day.