Inter Parfums, Inc. (IPAR) Q2 2018 Earnings Report, Transcript and Summary

Ladies and gentlemen, greetings, and welcome to Inter Parfums 2018 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [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 now begin.

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 Intra 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 store performance, 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 non-operating items supplemented our excellent second quarter operating performance. We had a $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 and cash equivalents and short-term investments and had a working capital ratio of almost 3.2 to 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 products 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.

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 are doing more and more business. Regions that not so longer go were anemic and are blossoming. As we reported yesterday, that through the first half of the year, our three largest markets North America, Western Europe and Asia a shift sales goal of 18%, 9% and 31% respective compared to the first half of 2017. Similarly, our next three markets ranked by size were Middle East, Central and South America and Eastern Europe have grown sales by 22%, 13% and 24% for the same six months period. While things can change, at present we do not see any headwinds facing this positive trend. 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 are producing - we're starting to produce and were starting to sell finished goods. We planned to be in stuck with our own components in the next two or three 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 two existing scents, the first one is 1981 and the recent one 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're working on additional flankers for 2019. Our worldwide distributor network is quite enthusiastic about GUESS, as we 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 open. Our goal is to be a top 10 fragrance in Russia in about two 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 rollout 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 de Nuit for Lanvin. And come September we have Coach Platinum launching a renew flank for Coach for Men which by the way, won first prize in June at the Annual Fragrant Foundation Award in the consumers 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 [indiscernible]. We have also a new pillar for Dunhill called Century, Century was stood exclusively at Howard and Dubai duty free last month and the global rollout is now underway. Also this summer, Abercrombie & Fitch adds First Instinct Blue for women to its fragrance portfolio and for Hollister, we have an entirely new fragrance duo call Festival Vibes, which 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 next year. And as I just mentioned, GUESS 1981 brand extension, we will have not to say about 2019 on our next conference call. On our last conference call, I stated that Coach has a 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 to remind there the other Coach business has been entirely home ground. Let me close my formal presentations. Before I take your questions by quoting one of our analyst, 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 co-brands performers the company maintains a well balanced portfolio of fragrance brand. While, large scale brands generate significant attention within the fragrance licensing sector IPAR has excelled at identifying under leveraged brands and scaling them to $50 million to $100 million fragrance business. We expect the company to further enhance its portfolio over the next one or two years with strategic licensees and brand acquisitions. And of course we cannot assure you that any future license or brands will be acquired. So now operator, you can open the lines for our question.

Thank you ladies and gentlemen we'll now be conducting our Q&A session. [Operator Instructions] Our first question comes from the line of Linda Bolton Weiser from D.A. Davidson. Your line is now live.

Hi. So, congratulations on strong profitability. So the gross margin even though it was down year-over-year it was down last and in the first quarter. So, I think that was due to the FX situation. And can we assume that as the euro 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. Thanks.

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

I'm sorry. Thank you, Linda I appreciate, I appreciate that question. The average exchange rate right now is hovering right around the $1.16, $1.17, which is 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 along as this exchange rate stays current levels.

Thanks. 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?

I don't Russ you want to add.

Yeah. I don't have a problem.

Recurring EPS, I mean, you can go ahead first and then I'll complete your answer.

Not a problem. The - a lot of the benefits from a comparison standpoint of second quarter versus last year, there are a few pennies that did result as a factor of the non-operating changes with respect to gain on foreign currency and of course the tax rate. The tax rate has been projective and it will 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 promotion 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 two percentage points, we spent about 2% 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?

Yes, it's always a question, do we maintain the estimate. But what I think is important is to tell you that business is in good shape we're 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 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 two quarters which is Asia, but we see good business in the U.S. our business in department stores is doing fine, we're gaining market share. For Jimmy Choo, for Montblanc, for Oscar de la Renta. So there is all our brands are doing - having positive results. We continue in China to see some extraordinary results on Anna Sui. Last time I check 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 pockets of growth coming in third and fourth quarter. But as you know the main - the largest launches and the new pillars the new blockbuster will happen in 2019.

Thanks. And then finally, on that last note with 2019 you listed several things. I didn't quite catch is there a Jimmy 2 major launch plan and what part of the year would that be in 2019, early or later in the year?

Yes, Jean, I don't know if you heard that. With respect to the Jimmy 2 launch, I don't think we have a set date yet.

We don't have a set date. While 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 Sonowa [ph]. Actually all our brands will have a blockbuster launch in 2019.

And I just want to add Linda that, what John went through 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 long schedules are pretty much set, and that's when we'll be able to let you know when the expectations are and what seasons were and what quarters we expect these different launches to take place.

Great, thank you very much.

No problem. Thank you.

Thank you. Our next question comes from line of Joe Altobello from Raymond James. Your line is live.

Thanks, hey guys good morning. Follow-up on Linda's question regarding guidance for the second half more or 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 you guys just kind of preparing for the major launches that you expect in early 2019.

I think 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 may fit comparisons a little bit difficult. And that's what we are 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.

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

Well, I think we have 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 six months we were up 5% on the Rochas business. When you look at just the three month period, it's down approximately 4%. You're comparing against last year where you had a major launch.

Really 2018 is remarkable in the first six months and I think the year is quite interesting and it's really a remarkable year. Because without blockbusters we are able to increase sales like 10% to 16% this quarter or which is quite - which means that there demand for existing products, there is no cannibalization with the flankers [ph] that we are launching. So, it's quite and it's preparing ourselves for 2019 where we will be more ambitious in terms of growth.

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

Yes, the answer to that is, yes. I mean we've been fortunate enough that so far this year we signed two deals. GUESS of course closed, and we closed the deal with Graff. There are a couple of other opportunities that we're exploring and we hope to able to make addition of 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.

Okay, great, thank you guys.

No problem. Thank you, Joe.

Thank you. Our following question comes from the line of Steph Wissink from Jefferies. You are now live.

Thanks, good morning everyone. Just two follow ups and thanks for all the detail already. The first question, and maybe Jean this is for you. Just related to overall category innovation. We have seen some indication that retail that some of the newer brands coming to market with a bit more experimentation or craft is another word we heard you use. Talk a little about may be the category innovation beyond some of the branded and licensed goods and where that might provide opportunity for 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 sometime stronger regional recognition. Where we like to get license after fashion brand or jewelry. So, we are not at all in art design work, I mean, art design type of brand I understand that we are doing well in especially stores, but the brands that we'll be looking for in the future are brands with higher recognition from large public.

Okay, that's helpful. And then Russ, a question for you, you talked a little bit about AMP spending shifting around. Are you finding that over the course of the last couple of years, your efficiency behind your AMP spending has actually improved it would seem so based on the incremental margins you're generating. I am curious if you can talk a little about may be what the mix of AMP spending looks like how that has evolved and if you are finding that some of the spending is actually generating superior return to what you've experienced in the past.

I don't really see other than a trend of more dollars going into social media type of expenditures. The overall AMP platform Inter Parfums has not really changed all that much. The key is that money is allocated and moneys are 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 expect it. 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 are at. We think that 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 you're consumer media and social media. But, overall, I think that the level that we've had is a good level and a higher enough level so that we can maintain the positions that we have in the market around the world.

Very helpful. And the last one question, is just to talk about the retail end markets. Can you give us an update on retail level inventories? What you're seeing in terms of channel mix? Anything that you think would be helpful as we think about the back half and then the opportunity set into 2019?

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

Thank you.

Thank you, Steph.

Thank you. [Operator Instructions] Our next question comes from the line of Hamed Khorsand from BWS. Your line is now live.

Hi. 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 networks and third parties. And how that would benefit or impact your gross margin going forward?

So far for the first six 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 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 is 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.

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 change up as far as Prestige in mass market?

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

Online, I would say online.

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

And then any mix change between Prestige and mass market as far as how that goes, what's being build up in the inventory?

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.

Okay, great. Thank you.

Okay. Thank you, Hamed.

Thank you.

Thank you. 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.

Thank you very much. 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.