Inter Parfums, Inc. (IPAR) Q3 2018 Earnings Report, Transcript and Summary

Greetings, and welcome to Inter Parfums Third Quarter 2018 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to Russell Greenberg, Executive Vice President and Chief Financial Officer of Inter Parfums. Mr. Greenberg, you may now begin.

Thank you, Devon. Good morning, and welcome to our 2018 third quarter conference call. Once again I will start the call with a financial overview, and then Jean Madar, our Chairman and CEO, will discuss our current business, recent development 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 heading Forward-Looking Statements and Risk Factors in our Annual Report on Form 10-K and the reports we filed 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 and 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 our third quarter performance, net sales were $177.2 million, a 4.5% from $169.5 million. At comparable foreign currency exchange rates net sales increased 5.4%. Net sales by European-based operations flows 2.4% to $137.8 million from $134.6 million. Net sales by U.S.-based operations were $39.4 million up 12.9% from $34.9 million. Gross margin was 61.6% compared to 61.0%. SG&A expense as a percentage of net sales came in at 41.9% compared to 41.5%. Operating income increased 5.5% to $35.0 million from $33.2 million before operating margin rose to 19.7% from 19.6%. Our effective income tax rate came in at 28.6% compared to 32.9%. Net income attributable to InterParfums Inc. increased 10.9% to $18.9 million compared to $17.1 million, and net income attributable to InterParfums Inc. per diluted share rose 9.1% to $0.60 from $0.55. Currency fluctuation in the third quarter had very little impact on our gross profit margin for European operations as the average dollar euro exchange rates in the current third quarter was 1.16 versus 1.17 in the same period last year. However, the average dollar euro exchange rate for the nine-month period was 1.20 versus 1.11 for that same period last year. And as a result of that weaker U.S. dollar in 2018 there was a small decline in gross margin for year-to-date European operations as compared to the same period last year. In the third quarter, selling, general and administrative expenses as a percentage of sales for European operations rose about 2% or about the same rate as the growth in sales. Now that the business of our U.S. operations is dominated by higher margin license prestige brands sales, the gross margin and SG&A expense as a percentage of sales has increased. The gross margin for U.S. operations was 50% up from 47% in last year's third quarter, while SG&A expense rose to 35% of net sales from 32% in last year's third quarter. This increase in SG&A is strictly a result of the increased royalty and promotional expenses. We continue to support all of our brands with ample and productive promotion and advertising and in the current third quarter that amounted to approximately 16% of net sales, not much different from the 15% spent in last year's third quarter. We have targeted 21% of net sales for our aggregate promotion and advertising expense for the full year. So as was the case last year, you should expect a significant increase in advertising expense in the fourth quarter. With regard to nonoperating items that influenced the bottom line there was a $1.1 million loss on foreign currency in the current third quarter compared to a $0.3 million loss on foreign currency in the third quarter of 2017. The Tax Cuts and Jobs Act made many changes to the U.S. tax code including the reduction of U.S. federal corporate tax rates from 35% to 21%. In addition in early 2018, the French government enacted a plan to lower the corporate income tax rate from approximately 33% to 25% over a five-year period beginning in 2018. As a result, our effective tax rate was 30% for the nine months ended September 30, 2018 as compared to 33% for the corresponding period of the prior year. Our financial position is as strong as ever. We closed the third quarter with working capital of $383 million including approximately $211 million in cash, cash equivalents and short-term investments and we had a working capital ratio of nearly 3.4 to 1. Long-term debt including current maturities aggregated 52 million. Based upon the strength of our balance sheet and favorable business outlook, our Board of Directors authorized a 31% increase in our annual cash dividend. Our current annual dividend is now $1.10 per share paid quarterly at the rate of $0.275 per share. We are on track to achieve our sales guidance of approximately 665 million for 2018 which will be our best year ever in terms of sales. And as we announced last month, we increased our guidance for net income per diluted share attributable to InterParfums Inc. to $1.61 for the year. As usual guidance assumes the dollar remains at current levels and we will be announcing our 2019 guidance next Monday after the market close. Jean please continue.

Thank you, Russ and good morning to you all. 2018 is turning into another very successful and productive year. We have been growing our sales and profits all the more impressive in the absence of a major launch this year. We have also added brands, expanded our geographic footprint and we have initiated the new direct-to-consumer, e-commerce enterprise and overall we continue to enhance our reputation within our industry and among potential partners. As we reported yesterday for the first nine months of the year, our three largest markets which are North America, Western Europe and Asia achieved sales growth of respectively 18%, 9%, and 22% for Asia, as compared to the first nine months of 2017. In addition in the Middle East and Eastern Europe, we have grown sales by 11% and 12% respectively, while in Central and South America, sales approximated last year. I will now talk about our newest and news worthy brands along with our plans for the coming year. And this time I will start for a change with U.S. operations. As we have reported, we began shipping GUESS products towards the end of the second quarter. We were initially relying on components from the former licensee to produce and sell finished goods. We are now in stock with many of our own components and in September and October we made major shipments of GUESS holiday season merchandise. Next year in 2019, we will further expand existing pillars with the new fragrance called 1981 Los Angeles. We'll have domestic distribution in the spring followed by international rollout in the fall and later in the year, we'll have a product called Seductive Eau, it's a brand extension for a pillar called seductive which started in 2010. These brand extensions will be supported by fresh, new, advertising that was just shot last week and also promotional campaign. And of course as we mentioned before, we'll have new major blockbuster for GUESS in the beginning of 2020. Another very gratifying story for us was Anna Sui, we had endured several difficult years with Anna Sui and we were patient but confident that the brand had all the old marks for winner especially in Asia, where Anna Sui does 90% of the sales. Throughout those years we maintained a strong advertising and promotional budgets, continually expanded and refreshed our product line, and in general we maintained our market share. And this has paid-off. Year-to-date, Anna Sui sales are almost doubled. We have a last family of Anna Sui fragrances including the recent edition of Fantasia, which has been a huge hit and which will be joined next year by Fantasia Mermaid. With regard to Graff, one of our newest licenses, we're moving forward with four scents women's collection, along with exquisite amenities, gear for the most exquisite hotels and travel venues, both of which are being ready to late next year. While most of our new product launches for existing brand with the extensions reveal new pillar, we do have a fragrance duo debuting for Abercrombie & Fitch, and the multi-scent men's collection for Dunhill. Moving on to our European operation, Coach is the biggest winner in terms of comparable quarter and year-to-date sales because for the quarter we're up 41% and for the comparable year-to-date we're at plus at 100%. Coach sales growth was driven by the continued popularity of the signature line for women launched two years ago, and signature scents for men introduced last year, as well as the success of new flankers, Coach Floral and Coach Platinum which came to the market this year. During the third with introduction of Jimmy Choo Fever along with staying power of brand's signature scents, helped bridge the gap between 2018 year for this brand sales with 2017. For Rochas, we recently introduced men's fragrance called Moustache and for Montblanc, we will launch in early - during January 2019, we'll launch a new blockbuster Explorer, and we will also rollout a new men scents for Jimmy Choo. We have also two women scents entering into the fall, one each for Coach and for Lanvin. So 2019 will be a busy year. Finally as we announced previously, we look forward to beginning the strategic partnership between our subsidiary Interstellar brand and IMG models to develop direct-to-consumer e-commerce fragrance and beauty businesses for IMG models and talents diverse and dynamic client base. Our first collaboration is with Lily Aldridge, a high profile super model who was Victoria's Secret Angel, and has been featured in Sports Illustrated. She's also well known for her work with Bulgari, Ralph Lauren, and Levi's. Lily is working closely with Interstellar to develop a unique fragrance line and an e-commerce site that will be connected directly to her social channels and devoted fans. Initial products are expected to be available for sale by the end of 2019. We are building the e-commerce platform, we'll handle all aspect of product development, packaging, production, marketing, fulfillment, and customer service. So we're also working closely with IMG to develop creative content to support the marketing and promotional effort. This partnership is we believe first in our industry and we think it's potentially groundbreaking. Drawing from our decades of experience creating products that capture and interpret the DNA of our brands, we will look to develop namesake products that capture the spirit of each luminary. Direct-to-consumer sales backed by social media rather than traditional advertising make this a very attractive and scalable business opportunity. Before moving on to your questions, let me wish you all happy holiday even if it's little early and very best for the New Year. Also Russ and I will be on the D.A. Davidson Beauty & Wellness New York Bust Tour on Tuesday, December 11. And we hope to see some of you at our office at that time. Now, operator, you can open the floor for questions.

[Operator Instructions] Our first question comes from the line of Linda Bolton Weiser with D.A. Davidson. Please proceed with your question.

So the dividend increase of 31% that's quite an impressive increase. Should we read into that that that's like a foretelling of what your earnings growth rate could be in 2019?

Thank you, in the whole discussion I think it's not really related to what our growth in 2019 is going to be. I think it's more directed to our cash position and to our strong balance sheet more than the growth of next year August.

Yes, the other thing I would say is we've taken a position each and every year to continue to build on the dividend and the dividend increase. At this point in time we are looking at distributing approximately 70% to 75% of current year earnings, and that was more of a function as to how we arrived at the amount rather than what is going to happen in the future. I think we're going to have to wait until next Monday to see exactly where we're looking at for 2019.

And then can I just ask on GUESS, you mentioned a few new scents for next year, 1981 Los Angeles, is that completely a new fragrance but it's not a blockbuster or is that an existing one? Can you just elaborate again what those are?

It is what we call an extension - a line extension. So it's a new fragrance but it's part of an existing line which is called Seductive, and which is called 1981. So it's a flanker, so it’s a way that you rely on. The new product will happen very beginning of 2020, where we launch the new blockbuster but all 2019 we will have animation with what we call flankers. But these are the fragrance that will be position in the market. We are very happy with our sales of GUESS, we are very happy with our sales of GUESS. We are happy to response specially from certain markets European markets we have great response from Germany, Holland, U.K. so all Western Europe has been responded very well to the existing line. As we said before, we will - the new fragrance that we’re introducing in 2020 will be a more elevated in terms of price point and in terms of distribution and the actual products. Russ you want to add something.

No, I think that you pretty much covered it. The concept of brand extensions and flankers is usually trading off an existing total fragrances. We typically use the same bottle and same cap but it is a new fragrance that is geared towards another consumer within that product line.

And then can you just say in the quarter was the U.S. division up or down year-over-year if you exclude GAAP from it?

Good question, I didn’t look at it but Russ maybe you can tell us….

We really do not want to comment on that because we really do not want to breakout in any way individual product sales. Our licensors have asked us not to do that, so I am going to try to beg off of that question Linda if you don’t mind.

Okay, that’s fine. Can you just also maybe give a little bit of color I mean your Asian sales have obviously been very strong year-to-date but are you seeing any weakening and how is the travel retail channels?

Yes, there is a lot, lots of questions about Asia in travel retail. What we see in Asia is very strong business. Our business is in a very good shape not only for Anna Sui but also for Lanvin and other brand. That's true - but as travel retail - and especially travel retail in Asia has been particularly strong. In our 2019 we expect this growth - for this part of the world to slowdown as we said before our sales in terms of Anna Sui have almost doubled this year comparing to last year. We are not anticipating another doubling of sales but still we see growth in Asia for all our brands and for duty free.

Our next question comes from the line of Joe Altobello with Raymond James. Please proceed with your question.

I had a question regarding 2019 I know we're not getting guidance today I have to wait till Monday I suppose but if you look at your A&P spend last year it was around 20 months of sale, this year it’s around 21 months of sales. Next year it sounds like it’s a very busy launch schedule relative to this year. So how do we think about A&P spending next year within that busier launch schedule, will it stay at that 21% range or is there a chance it kicks off to support those new launches?

I think that our plan is currently is to hover right around that 21% even in years where you don't have a blockbuster launch or you're not launching blockbuster fragrances, you still need to invest money in advertising and in your markets. A perfect example as even as Jean just mentioned with respect to GUESS next year, we will have a complete advertising campaign surrounding the flankers that we’re creating for a seductive and 1981. So, regardless as to whether or not it's a blockbuster fragrance, you still need to support your fragrance, your brands and whatever you're launching in the marketplace. So our current plans today are to hover stay right around that 21%.

And if I may add - I would like to talk about the major launches for next year major launches for next year I am going to go quickly brand by brand. The biggest one will be definitely Montblanc, we will launch Explorer new blockbuster for Montblanc and this will happen very beginning of Q1. So when you have launch that starts in the beginning of a year we will spend across the year at least 20% of our sales in promotion and advertising. After that in Q2 you're going to have a Lanvin, a women's fragrance call Girl in Capri. This will launch in Q2. And in Q4 you're going to have a new Jimmy Choo for men. And for the U.S. brands we're going to have a new Abercrombie starting Q2. So I will say that Q1, Q2, Q3, and Q4, I'm expecting around to be at the same type of percentage above 20% for advertising.

Okay. So next year is not going to be as back-end weighted, it sounds like as probably this year?

I think it will be less, yeah absolutely, absolutely because we have a full year. The new Explorer will be launched in all the countries at the same time and we're going to start that January 1. It's a first for us because usually we launch in one or two countries and then we rollout to other countries but with the strength of Montblanc and with the appetite of retailers and duty-free operators, we have decided to launch simultaneously in almost 100 countries. So we'll have a big launch start in Q1.

And then secondly, it sounds like in your response to Linda's question that you're not seeing any real weakness in Asia despite some market concerns out there, which obviously is good to hear. Anna Sui has made a lot of progress over last year to – what's different about that brand over the last couple years that have helped you guys to turn around? Was it all new product, was it marketing, was it accommodation to that really helped to drive that section of growth?

Yes, we have boosted a lot of marketing. We spent a lot of money with Tumulte. We had major compounded product is well accepted. Let's not forget that the taste of the consumer is very important and the product that we have launched for Anna Sui was really geared for the young Chinese teenagers. We tested the product with focused groups, so we had perfect smell, very interesting bottle, very interesting very funnier animation. So I would say that we had all the ingredients for success for this market. Let's not forget that Anna Sui sales are almost 90% or 95% in Asia, well in China, in Taiwan, in Korea, and also in Southeast Asia. So when we make a product that is very, very targeted for particular region and we spend large amount of money in advertising, we collect the fruits and it has been very successful for us.

Our next question comes from the line of Steph Wissink with Jefferies. Please proceed with your question.

We have a question on GUESS. I think in your release you talked about positioning it globally more in the Prestige category and then in the domestic market, maybe a bit more in the mass use category. Can you talk a little bit about that positioning dichotomy? Is that aligned with how the brand is positioned around the world or is that you stepping out and providing a slightly different positioning internationally versus the U.S. market?

Yes, of course. We are absolutely following what GUESS is doing in the U.S. and outside the U.S. Outside of the U.S. GUESS is positioned at higher level than domestically and we wanted to carry this type of positioning. So outside of the U.S. in countries like France, Italy, Germany, GUESS will be sold as a designer fragrance competing with Ralph Lauren, Calvin Klein, and all the other American designers if you want. GUESS has a very, very strong name recognition in many parts of the world and the price points of the closing outside of the U.S. is quite high. We were in Russia for instance last month looking at the market for GUESS and GUESS is opening a lot of stores in Russia, we're advertising lot. So we will definitely position it as a normal designer fragrance not at all in domestic area. In the U.S, it's different because we will not be selling GUESS in regular Macy's or department stores, but will be more in core and this kind of distribution. So of course the response will be different.

And then just a follow-up on Coach. That brand has been remarkably strong for a number of years. I think you mentioned you launched the women's fragrance in 2016, couple of years already but still the brand pacing up north of 40% growth. Is there something that you're signing with some of your new brand launches that the curve or that the demand profile actually extends a bit longer than maybe what we've seen in the past? Are you finding that whether it's by design or architecture of your core brand and your flankers or your marketing mix that some combination is resulting in this strength being elongated versus what we would see historically?

It's a difficult question. Coach - of course we have the strong sales in the U.S. because the brand has huge name recognition in the U.S. and we are gaining market share quarter-after-quarter in the U.S. What is interesting on Coach is that the secondary markets European markets or even Asia - Asia was stronger always than Western Europe, but these are the markets where we are picking up lot of sales. We didn't expect honestly to have this type of demand for Coach in U.K. or in France and Germany and also in Russia. But we think that Coach has been through their advertising and through their products and their stores. They have really made great progress and today they are considered the Louis Vuitton of the American Vuitton, and that's why people are responding that well to the brand. We see - I don't like to say that it's a surprise but we are betting on this, and the brand has done very well especially outside of the U.S.

Our next question comes from the line of Hamed Khorsand with BWS Financial. Please proceed with your question.

The first question I had was just about the sales that falls into the fourth quarter of this year, is that really just a timing of shipments versus prior years?

I don't think that - I don't know if there was - I wouldn't say timing or anything like that. The sales that came in during Q3, the fact that we maintained our guidance exactly what we had before really just indicates that we were pretty much on our targets with respect to what we were expecting in sales. Again, this is a year where it's a little bit of a consolidation. There are no blockbuster launches. So we really didn't think we would have any major surprises and we were very pleased that the numbers came out pretty much as expected.

Well, I was referring to it because historically it has been a 12% drop-off quarter-over-quarter when you go into Q4, your guidance implies that the drop-off will be closer to 5%, that's where my source of my question is coming from.

Right. But when you don't have a blockbuster launch coming out in the holiday season, you don't have a pipeline sale, so you are basically just continuing your every day sales with your distribution network. And that could cause a differential from one quarter to the next.

And then as far as ads spending goes, are you - is there a change in the mix between where your traditional and digital or is it pretty much the same as far as the strategy goes?

No, we are increasing digital quarter-after-quarter. For some brand it represents now 30% of our spending, of our adverting spending but it varies from brand-to-brand.

Yes, I mean the perfect example is really the Anna Sui brand which is clearly targeted towards the Asian community and the young community. I would say most of the advertising done on the Anna Sui brand is digital.

Ladies and gentlemen, we have reached the end of our question-and-answer session. And I would like to turn the call back over to Russell Greenberg for closing remarks.

Thank you, everybody. We appreciate your questions and your comments. We will - please everybody look forward for our press release on Monday evening, November 12, where we will be putting out our guidance for 2019, and thank you all for tuning into our conference call. As usual, if you have any further questions, you can contact me at my office. Thanks very much and have a great day.