Inter Parfums, Inc. (IPAR) Q2 2017 Earnings Report, Transcript and Summary

Greetings, and welcome to the Inter Parfums' Second Quarter 2017 Conference and Webcast. At this time, all participants are in a listen-only mode. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Russell Greenberg, Executive Vice President and Chief Financial Officer. Please go-ahead sir.

Thank you, Stacy, for the promotion, but I’m the Chief Financial Officer. Good morning everybody and welcome to our 2017 second quarter conference call. As usual, I will begin the call with a financial overview. And then, Jean Madar, our Chairman and Chief Executive Officer, will discuss current business, recent developments and 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. In addition, Regulation G, which is codifications for the use of non-GAAP financial measures, prescribes the condition for use of non-GAAP financial information in public disclosures. We believe that the presentation of the non-GAAP financial information included in this discussion is an important supplemental measure of operating performance to investors. The information required to be disclosed for the presentation of non-GAAP financial measures is disclosed in our June 30th, 2017 quarterly report on Form 10-Q which has been filed with the Securities and Exchange Commission. This information is available on our website at www.interparfumsinc.com. 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. Moving on to comparable second quarter results, net sales were 129.1 million, up 10.2% from 117.2 million. At comparable foreign currency exchange rates, net sales increased 11.3%. Sales by European based operations rose 20.5% to 106.7 million from 88.6 million. Sales by US based operations declined 21.5% to 22.4 million compared to 28.6 million. Gross margin was 65% compared to 63.5%. SG&A expenses as a percentage of net sales was 53.8% compared to 53.7%. Operating income increased 26.3% to 14.5 million from 11.5 million and operating margin rose 11.2% compared to 9.8%. Finally, net income attributable to Inter Parfums Inc. increased 15.7% to 6.7 million or $0.22 per diluted share and that compared to 5.8 million or $0.19 per diluted share in the prior year. Thus, for the year-to-date net sales were up 19% to 272 million from 228.7 million resulting in net income attributable to Inter Parfums of 20.1 million or $0.64 per diluted share up 52% compared to 13.2 million or $0.42 per diluted share one year earlier. You may recall that our first quarter of 2016 and the results we included the effect of the settlement of the tax assessment with the French tax authorities in the amount of 1.9 million. Excluding the effect of that settlement, net income attributable to Inter Parfums Inc. for the first half of 2016 would have been 14.6 million or $0.47 per diluted share. Since our recent press releases discussed sales drivers, I will focus on factors that impact profitability. The increase and higher proportion of European based sales had much to do with the 150-basis point increase in consolidated second quarter gross margin. For European operations, gross profit margin was 68% and 67% in the second quarter of 2017 and 2016 respectively with that increase primarily related to the stronger dollar to euro exchange rate. The average dollar euro exchange rate for the three months ended June 30th 2017 was 1.10 compared to 1.12 for the corresponding period of the prior year. For US operations, gross profit margin was 48% and 53% in the second quarter of 2017 and 2016 respectively with margin contraction related to the shift and product mix as the second quarter sale decline was due to a very difficult comparison resulting from the initial launches of Abercrombie and Fitch and holistic products in last year’s second quarter. SG&A expense increased 10% as compared to last year’s second quarter and represented 54% of net sales for both the current and prior year’s second quarter. The European operations which achieved comparable quarterly sale growth of 20.5%, SG&A expenses only increased 18% and represented 56% of net sales in the current second quarter as compared to 57% in the second quarter of 2016. The 21.5% decline in second quarter sales by US operations was matched by a similar decline in SG&A expenses and represented 44% of net sales by US operations for both the current and prior year second quarter. Promotion and advertising included in SG&A expense aggregated 30.5 million or 24% of net sales for the 2017 second quarter as compared to $24.9 million or 21% of net sales for the same period one year early. That increase related to the new product launches and rollouts in 2017. Operating income rose 26.3% and our operating margin in the current second quarter was 11.2% versus 9.8% one year earlier. As we noted in our earnings release yesterday, there was an $817,000 loss on foreign currency in the second quarter, as compared to $660,000 gain in last year's second quarter. Also of note our effective tax rate was 33% in the current second quarter, as compared to 36% in last year second quarter. We closed the quarter with working capital of $358 million including approximately $241 million in cash, cash equivalence and short-term investments. Our working capital ratio of 3.4 to 1 and only $69.1 million of long-term debt including current maturities that were incurred in connection with the 2015 Rochas' brand acquisition. Finally, assuming the dollar remains at current levels and with the benefit of a strong first half and greater visibility into the second half, we expect 2017 net sales to be in the range of $560 million to $570 million, resulting in net income attributable to Inter Parfums to be in the range of $1.25 to $1.27 per diluted share. Of note, certain brands are outperforming what we initially budgeted back in November, when we established our initial 2017 guidance. Specifically, Jimmy Choo [Indiscernible] Rochas as well as Coach are performing better than originally anticipated. Jean, please continue.

Yes. Thank you, Russ, and good morning everyone. One of the most encouraging signs in our business is half sales in all of our markets are up thus far this year. In Western Europe we’re up, North America and Asia, the three largest markets are up with [Indiscernible] up 4%, North America we are up 25% and Asia we are up almost 20% compared to the first half of 2016. Our next three markets ranked by size the Middle East, Central and South America and Eastern Europe achieved sales growth of 30%, 15% and almost 100% for Eastern Europe respectively. So, for the remainder of the year, our launch brand include a third legend Pillar for Montblanc, called Legend Night which is debuting at the end of this year with the rollout continuing in 2018. Once again, we have the legend model Simon Clark as our ad model and spokesperson this time wearing formal wear jacket and tie for this new Legend Night. We have also Coach for men unveiling in the fall. For starters, it looks like we will have $2,000 and between €8,000 and €10,000 followed by another $3,000 to $4,000 in January. I think we found a perfect face for our ad campaign with James Franco, who embodies the creativity, confidence and style of the Coach line. Moving on to the other launches for this year, we’ll have Dunhill icon racing making its debut in certain markets in September and October with a huge rollout during year-end and first quarter of next year covering literally all of Europe, the Middle-East, Asia, Africa and much of South and Central America. This doesn’t have a land on US stores until 2018. We also have Front Asia by NSV, debuting later this year targeting the greater Asian market. However, the launch in China will be the following year due to loan registration period that is required to sell the product in China today. We expect these launches to have a very favorable impact on sales by US operations for the second half of the year. To update you on some of our current plans for 2018 our new interpretation of our superhit [indiscernible] is in the pipeline as are also extensions of Jimmy Choo, women's signature scent and our signature men's and women's for Coach. On our last call, I indicated that our first few men scents for Rochas was planned from next year, 2018 but we have decided to move it to 2019 and we will be adding also new members to the Van Cleef & Arpels collection from the extraordinary [ph] family as well as the multi-scent Boucheron collection. Moving on to 2018 plans for US operations, we have a brand expansion for the Hollister Wave collection coming to market early in the year and completing new Hollister fragrance family launching in stores in the spring of 2018. Both our fragrance duos ranging from men's and for women's. For Oscar de la Rent, we have the women's scent called Bella Blanca that will be hitting the market in the spring of 2018. We also have a new fragrance family debuting for Dunhill called Century, a global launch of [indiscernible] for NSV is in our schedule to debut next summer and for other [indiscernible] we have several brand expansions planned including two for men in the first quarter and one for women in the summer. The first Instinct portfolio collection of Abercrombie will ultimately be complete in 2019 with six segments, three each for men and for women. What more can we say, business is good and growing in all markets and the month of July was also a very strong month. We have a rich and diverse portfolio of brands. And we have a financial strength to be a contender, when suitable double acquisition and other licensing opportunities arise. We have an extraordinary global distribution network made up of national and regional market experts which gets product placed in the venues, expertly direct our advertising and promotional programs in that territories and optimize sales in the 100 countries where our products are sold. While our pipeline of new products is plentiful we also enjoy the recurring benefits of several reliable top sellers. I hope you saw the news we issued on July 31, announcing that Veronique Gabai-Pinsky, President of the Vera Wang Group is standing election to our Board of Directors, at our annual meeting on September 12, filling the vacancy, that Jean Levy released upon the retirement from our board, after 20 years of distinguished services. As we summarized in our news release Veronique has an exceptional resume and will no doubt be a terrific addition to our board. Before turning it over to the operator for our traditional Q&A session I will like you to know that we are reaching a special milestone in our corporate history. On February 14 of next year, we’ll mark our 30th year on NASDAQ as a public company by ringing the closing bell. So, operator, you can open the floor for questions.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Linda Bolton Weiser with D.A. Davidson. Please proceed.

Hi. So, in terms of the sales guidance increase for the year of $10 million, it looks to me like most of that is FX related, is that the case or is that from the non-FX related?

Russ, you want to answer the question?

I think there’s a little bit of a combination, FX really did not impact at all in the first half of 2000, I think it represented less than 1%. The dollar has shown some recent weakness. So, the Euro showed a little bit of strength. So, it plays a small role, but I think most of it is because of business. As I mentioned there were four brands, Jimmy Choo, Rochas, Coach all performing a little bit better than expected.

Okay. And then you ran through a lot of things that you have coming in 2018, it sounds like a busy year of launches. If you had to hone in on just a couple of the most significant things, would they be the Jimmy Choo and the Coach expansions and are those both in the women’s area? Is that what's planned for 2018?

Don’t forget [indiscernible] we’re going to come up with a new [Indiscernible] women’s to complement [Indiscernible] and yes and of course Jimmy Choo. Then in the U.S. also we are going to have a busy year with new Oscar, a new Dunhill. So, it’s quite balanced, I think we have new products from the important brands, so we look forward for busy year 2018.

Okay. And just Russ, on a question on the margins, you mentioned that FX did play some role in the gross margin expansion in the quarter, so I think with the euro comparison being more up year-over-year in the third and fourth. So, should we expect a little less growth margin expansion in the third and fourth quarters year-over-year?

Yeah, I think that would be correct. Again, I can’t anticipate exactly where the euro dollar exchange rate is going to go. I’m not expecting the euro to be extremely strong. Our gut feeling is just that it’s probably going to be kind of close to where it is now and then that’s the assumptions that we make. Clearly at [115 or 116 or 117] [ph] it’s a stronger euro that will play a little bit of a roll in our gross margins. I don’t really expect it to be anything too significant though.

Okay. And just finally on the royalty expense ratio was a little bit lower than we had expected. Is there some particular reason for that in the quarter?

As I mentioned in the queue, we saved a little bit on the renewal of the ST department license and the sale of the [indiscernible] license which had relatively low sales in a higher royalty rate as a result. But I also believe that with the continued growth of Rochas and the continued growth that we’ve seen recently with [indiscernible], these are play into the fact because those are both brands that we do not pay royalties on. So, I think we can see we are usually around 7%, 7.1%, 7.2% I think that number will go down a little bit as time goes on.

Thank you. Our next question comes from Joe Altobello with Raymond James. Please proceed.

First question I want to go back to US based ops, looks like I think back in March you guys mentioned that you thought that business would be up in high singles, low doubles for the year and obviously it's down a little bit year-to-date. You do have a new Dunhill fragrance coming out on the sweet fragrance coming out, would those be impactful enough to really accelerate sales in the back half?

I know that in the first six months we showed sales that are down compared to last year but last year the comparison was difficult but I will say that already by the end of July or middle of August sales are going to be almost equal and going to have a gain of product. We have the business in the US is strong but we had to delay some other launches, that’s why our sales are down for the quarter and for the six months.

Yeah, the only thing I would add is for the six months where its only down around 5%. I think that we can probably stand at and it will probably be I don’t remember saying low double digits but I think that towards the end of the year certainly in the single-digit range I think will have for the US operations an increase.

Okay. So, second half I mean if you look at your guidance it sounds like you guys are assuming US based ops will outpace growth in your European operations which probably further downward pressure on gross margin I would think including FX.

Yeah, I don’t really see how FX is going have that big of a role going into the third and fourth quarter. But you’re right the US operations growth rate should outpace slightly the European growth rate in the last half of the year. But I don’t really see that having any major impact on launches. It’s more the FX than going to have the effect on the gross margin.

Okay. Okay. And just one last one, you guys are still sitting on lot of cash here, any update on your plans to deploy that, what the market for trademarks looks like for example?

Well we are active, we are trying we are actively looking, we cannot make any announcement of course but this is here acquiring new license of trademarks are basically in our plants. Russ, you want to add something?

No, I think the answer is that, there has been no change, we are still actively pursuing, putting that cash to use.

Thank you. Our next question comes from Jason Gere with KeyBanc Capital Markets. Please proceed.

Okay, great. Congratulations. Really being able one of the few CPG companies is actually driving positive volume growth in the quarter. So you should -- that’s obviously an accomplishment. I guess two questions one, following up on Joe’s question. So as we think about Europe in the second half of the year the organic sales I know you have to sell enough Coach in the expansion there in some of launches, but comparing that to some of the I guess some of the strong sell-through we saw last year, it sounds like we should expect kind of -- we should see growth organically in Europe and U.S. would track just a little bit faster. I just want to make sure that I understood that correctly?

That’s exactly correct. For the European operations, we have some very difficult comparisons as we move into through a period where you are comparing 2017 to 2016 which included the launch of Coach. That was a very, very strong launch for us in the second half of last year and it will make for a little bit of a difficult comparison and that’s the reason why the U.S. based business will outpace or is at least anticipated to outpace the European business for the second half.

Okay. And then I guess when you look at the quarter and the performance…

But I would like to add also that, I agree with Russ, but the fact that we are able to launch a new Montblanc, Legend Night quite early in the third quarter, I think we should be able -- if it works we should be able to get some reorders before Christmas. So, definitely Europe will have a difficult comparison for third quarter but we could -- we do have some good surprise in the fourth quarter.

Okay. Thank you, Jean. And I guess when you looked at the performance that you delivered this quarter versus maybe where you were a little bit before were there any regions or channels that you were surprised by how strong the trends are again. I know beauty kind of is I would say an anomaly and a very tough retail environment but if -- it maybe e-commerce or are you talking about like which regions, which markets were a bit stronger than you thought and just in terms of how that can expand maybe as you get into the back half of the year?

I mean certainly our sales activity in Eastern Europe have really picked up compared to the last several years, where there was quite a bit of difficulty within that marketplace. I know it’s dealing from a smaller base so on almost a 94% or almost a 100% increase isn’t as significant to some of our bigger markets but it really plays a big role with some of the brands that we have. Also, the Asian market, especially China which is picking up a little bit, those I don’t want to say they come as a surprise but you know it’s nice to see a little bit of a turnaround.

Yeah, definitely a turnaround in China and Russ, let's not forget that the US and the North American business in Canada is up about 20% to 25%.

Yeah 25% exactly.

Frankly it's quite a surprise, we had a very good sell through of our programs in the US and third quarter looks also strong. So, it's not that we have -- its not enormous but it’s a little bit better than our plan. That’s why I think we raised our guidance.

Okay. And then the last question, then I’ll hop off. A&P was very nice to see and obviously beat in the quarter and the high-quality beat that is you saw the A&P spending really get good returns. So, I guess I know in the past you talked about 20% as a percentage of sales, now you’re at 21%. I guess the question is where do you see that number going? The 21% obviously you could invest more because the first quarter you had better earnings growth coming through you can reinvest. At what point, do you think that it kind of levels off? Is 21% now kind of the right way to think about it or would you continue to just keep investing if you think you’re getting that incremental return. I’m just trying to think about how you can manage margin versus kind of the sales growth algorithm going forward. Thank you.

It’s a very good question. Russ, you want to start, I’ll join after.

Yeah, certainly. I think number one is want to reiterate that the 21% that I mentioned for the current year has not changed. I still believe we’re going to end the year with around 21% of our sales spent on promotion which implies almost 23% being spent in the second half because we spent around 19.5% or so for the first six months of the year. So, we’re looking at around 23% and the only other thing I’m going to mention, the only thing that really changes that number is your new launch schedule. Alright, because whenever you do have a new launch of the new pillar fragrance, new family fragrance, that needs to be supported with advertising at a higher level than your ongoing, existing or flanker type product that’s being launched. Jean?

Yes, for me it is key to keep increasing the spending for A&P [ph] because we see the future of our sales. So, at 21% I’m comfortable if business continue to grow with maybe a point or two on the G&A and I will like to spend a little more in advertising. This is the best insurance for our future sales.

[Operator Instructions] Our next question comes from Frank Camma with Sidoti & Company. Please proceed.

Hi guys this is Frank [indiscernible] on for Frank Camma. Just to kind of follow up on the A&P, looks like it's kind of near an all-time high as a percent of revenue, is there any -- you mentioned the launches, is there any other one-time things this year and then also can you maybe break out the difference the traditional versus digital and if that’s different then what it’s been in the past?

The first part of the question, which really you talked about increases over the course of several years, I think that falls exactly what Jean was just saying that the best investment we could make for the future of our business is to continuously increase our ad spending. And even if we can save a few points here and there are some other G&A type items to reinvest it in A&P type of spending is the best thing we can do for the company. The only thing I’m going to add to that before I answer the second part is, keep in mind that, this is dollars that we spend in advertising and marketing and promoting product, that is included on our G&A. When we’re working with our distributors around the world, our distributors also spend a certain percentage of their sales on marketing in their local territories. So, the amount of spending is actually far in access excess of the 21% that we see here. As far as the breakdown between digital and traditional advertising, I think every company in the world is moving more-and-more-and-more into the digital arena. Fragrance for a variety of different reasons, still spends a significant amount in the traditional type of advertising. The magazines, the scent strips it gives the readers or it gives people the opportunity to actually smell the product. But certainly, I can’t go into details of exactly how much, but I think there is clearly a shift to reach the customers of today by moving some of your advertising dollars into the digital arena.

Our spending is not only advertising, it's also promotion, it's also a presence in the point of sale, how we look and the activities that we’re having in order to animate the business. So, yes, we look at and we’re spending more into digital media, but it is very important to keep a good presence in the stores and we are spending fair amount of money there.

Thank you. Then just quickly on the operating leverage with the nice revenue increase. Can you just talk about if that was in line with what you had thought and if you’re still spending some unfixed costs or any color you can give there?

I really did not hear you?

Can you repeat the question?

Sure. The operating leverage, we saw a nice increase in revenue obviously, just wondering if that was the leverage was in line as what you guys were anticipating or if you’re still kind of investing in the fixed cost structure there?

Yeah, the operating leverage, we really look at our operating leverage for the full year, because the promotion and advertising budgets are so skewed from one quarter to another with a lot of the spending in the latter part of the year, much of it even in the fourth quarter. So, it’s very difficult to look at the operating income on a quarterly basis. So, we tend to look at it on a yearly basis and you know last year we ended the year at somewhere in the high 12%, 12.5% maybe even almost 13%. As we move into 2017, I think we’re certainly going to be over 13%, how much over, I don’t know but we are heading towards our goal of reaching that 14 or 14.5% which we believe is where this business should be. So yes, I think we’re going to hopefully try to continue to gain operating leverage as we continue to increase our sales.

Thank you. Our next question comes from Steph Wissink with Jefferies. Please proceed.

Thanks, good morning everyone. Russ just a couple of follow ups on channel performance in particular. I’m wondering if you can talk a little bit about the different channels in the North American market as well as around the world, department stores maybe some of the emerging specialty players and in the drug store channel in Europe?

Yes, I can try. In Europe, all of our business in Europe is in department stores and in the independent consumer range and some internet website. We do not sell drug stores, drug chains in Europe. In the US, our business is I will say 70% into traditional department stores, we do business with ALTA and we do business with Sephora, but you know that Sephora in the US sells more cosmetics than fragrances and so our presence is much stronger in department stores. So, the growth that you’ve seen in the US is 25% growth is really coming from our programs in department stores. So, we’re really gaining market share for sure. Russ do you want to add something?

No, I think there has always been because we always see the traffic moving away from department stores and into other stores like ALTA. But for our business the department store has still remained one of the strongest elements.

Thank you. One follow-up on travel retail, I’m wondering if you can just give us some sense of how the category is performing at travel retail and then any specific markets or large travel hubs that you would want to call out just given the success you’ve had with some of your both owned as well as license brands.

US Federal retail is doing quite well, Europe retail also. We have some challenges in Asia specially in Korea, it's not a secret. It happens to many companies, the lack of tourism and lack of traffic in Korea. But otherwise I would say that we are making more and more special programs for duty free operators and quite successful.

Over the last several years the amount of our business in travel retail has clearly been increasing. Today it’s probably about 15% to 17% of our business. Something along those lines. So, it clearly has been a strong market for us.

And thank you. Our next question from Hamed Khorsand with BWS Financial.

Hi. I just wanted to follow up here on the discussion with marketing. In the first half, you’ve spent less than your target range and you got it more out of each dollar spent and then you are talking about second half increasing that to 23%. Are you getting better traction, better return on those dollars spends and does it make sense to do that 23% spending in the second half. I’m just trying to get understanding here because the first half was very strong on the sales front?

Yes, it’s okay to insist on that, because this is a key part of our model. We spent in advance in order to make sure that we have we reorders, it’s very, very simple. So, we are going launch very important product from Montblanc in the second half, we are going to launch Coach for men, so definitely we’re going to over invest and that’s why you go to the 23% in the second half. The results we will see then in first and second quarter or of 2018 or so. So, if this formula works for us and I think it’s absolutely fine to go to this level.

Yeah. I think the spending also follows, where the actual buying of the product happens at location. We sell in to our distributors and the product then eventually ends up with the retail. The customer is buying at the retailers at a later period of time and here you have holiday seasons coming up in the third and fourth quarter, the advertisement is specially needed to drive to sell through.

Okay. Are you seeing anything in the early goings right now or is it too early for the holiday spend inventory build.

The city is quite good. We have orders that we have received for July, August, September are quite strong so, the stores will have a good amount of inventory, we have to make sure that it sell through, that’s why again it is key to do this spending. But business for the third quarter is very promising.

Okay. My last question is, is there any update on your online [indiscernible] to sell more online?

No, we do not have particular update. We are working on lot of projects that we are not ready to make announcement.

We have a follow up question from Linda Bolton Weiser with D.A. Davidson. Please go ahead.

No well I think all my questions are answered. But I was just wondering on the e-commerce side. What percentage of your sales are through e-commerce and is it mostly department stores, dotcom type sales?

Today, it's mostly department stores, dotcom or internet fights [ph] from retailers. We do business muted, but we do some business with Amazon, but the goal will be to increase our presence, our sales through internet either with special or particular brands or special programs. We have a team in our company working on this project but again not ready to talk about it.

There are no further questions. I would like to turn the call back over to Russell for closing comments.

Well thank you again operator. Just a quick point, I will be presenting at the KeyBanc Investor Conference in New York City in early December. I’ll know more about the specific dates by our next conference call in November and as usual if you have any further question please contact me at my office and enjoy the rest of your day as well as the rest of the summer. Thank you.

Thank you, thank you everybody.

This concludes today’s teleconference. You may disconnect y our lines at this time and thank you for your participation.