Inter Parfums, Inc. (IPAR) Q2 2019 Earnings Report, Transcript and Summary

Greetings and welcome to the Inter Parfums Second Quarter 2019 Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Russell Greenberg, Executive Vice President and Chief Financial Officer of Inter Parfums. Mr. Greenberg, you may begin.

Thank you, operator. Good morning, and welcome to our 2019 second quarter conference call. We will proceed with our standard format. After my review of financial performance, Jean Madar, our Chairman and CEO, will provide an overview of our business and share some of our plans for the future. And then we will open the floor to questions. Before proceeding further, I just want to remind listeners that this conference call may contain forward-looking statements, which involve known and unknown risks, uncertainties and other factors that may cause actual results to be materially different from projected results. These factors include, but are not limited to the risks and uncertainties discussed under the headings Forward-Looking Statements and Risk Factors in our annual report on Form 10-K and the reports we 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. When we discuss our United States-based operations, we are primarily referring to sales of Prestige Fragrance products conducted through our wholly-owned domestic subsidiaries. As I review our second quarter, please keep in mind that the average dollar-euro exchange rate for the current second quarter was 1.12, compared, to 1.19 in the second quarter of 2018. As a reminder, a strong U.S. dollar has a negative impact on our net sales, but a positive effect on our gross profit margin. And this is because over 45% of net sales of our European operations are denominated in dollars, while almost all costs of our European operations are incurred in euro. With regard to the current second quarter as compared to last year's, net sales were $166.2 million, up 11.3% from $149.4 million. At comparable foreign currency exchange rates, net sales actually increased 13.7%. Net sales by European based operations rose 8.7% to $125.6 million from 115.6 million. Net sales by U.S.-based operations increased 20.4% to 40.6 million from 33.8 million. Gross margin was 64.3%, compared to 64.0%. SG&A expenses as a percentage of net sales were 50.8%, compared to 51.5%. Operating income increased 19.7% to $22.5 million from 18.8 million. Operating margin rose to 13.5%, compared to 12.6%. Our effective income tax rate was 29.5%, compared to 30.2%, and net income attributable to Inter Parfums, Inc. increased 13% to 12.3 million from 10.9 million, resulting in a per diluted share increase of 11.4% to $0.39 from $0.35. Thus, for the first half of 2019, consolidated net sales increased 7.3% to $344.5 million as compared to $321.1 million for the corresponding period of the prior year. At comparable foreign currency exchange rates, net sales increased 10.4% for the 6-month period. Sales by our U.S. operations are running 35% ahead of last year's first half, and the increase in second quarter by European operations more than offset their small first quarter sales decline. Net income attributable to Inter Parfums, Inc. rose 16.4% to $31.2 million for the first half of 2019, from $26.8 million in 2018. We have reviewed brand sales fluctuations in our recent press releases, so I will move to discuss on profitability inputs, as well as the operating leverage that we are gaining. Gross margin for European operations was 68.4% and 68.1% in the current and prior year second quarter. As was the case in the first quarter, the stronger dollar benefited gross margin, but the benefit was offset by higher than typical costs associated with the production of our new Montblanc Explorer product line. For U.S. operations, gross profit margin was 51.6%, compared to 50.2% for the second quarter of the prior year, with greater sales of Prestige products under license once again being the main contributor. SG&A operating leverage, especially for a smaller and faster growing U.S. segment, has been a very important contributor to our overall profitability. In the current second quarter, SG&A expenses for U.S. operations increased 17.4% on a 20.4% increase in net sales. And those expenses aggregated 40.2% of net sales, as compared to 41.2% in the second quarter of 2018. With regard to our European operations, there was an 8.3% increase in SG&A on an 8.7% increase in net sales. Promotion and advertising included in SG&A was $36.4 million, up 12% from $32.5 million in last year's second quarter and were 21.9% of net sales, up slightly from the 21.7% in last year's second quarter. We have significant promotion and advertising programs underway, and we are still targeting 21% of net sales, or about $150 million for promotion and advertising expenditures for the full year. One other item is worth noting here, and that's a $500,000 loss on foreign currency exchange in the current second quarter, compared to a $1.5 million gain in last year's second quarter. Our financial position remains extremely strong. We closed the second quarter with working capital of $376 million, including approximately $214 million in cash, cash equivalents and short-term investments. With a working capital ratio of over 3.1:1 and just $10.5 million of long-term debt. We continue to look for 2019 net sales to come in at around $712 million, resulting in net income attributable to Inter Parfums, Inc. per diluted share of approximately $1.88. And of course, as usual, guidance assumes that the dollar remains at current levels. Jean, please continue.

Thank you, Russ, and good morning to you all. Before moving on to our new and future plans, I just want to review the status of our markets. As we reported through the first half of 2019, our two largest markets, North America and Western Europe, outperformed last year's first half, with sales growth of 13.3% and 7.9%, respectively. The over-gainers were the Middle East and Eastern Europe, where sales rose 28.8% for the Middle East and almost 4% for Eastern Europe over the first half of last year. As we anticipated, with the launch of the new Lanvin women's fragrance called A Girl in Capri and the new Anna Sui women's fragrance called Fantasia Mermaid, Asia bounced back after a slow first quarter and the nearly 7% sales gain in that market in Q2 mitigated most of the 9% sales decline in Q1 in Asia. I would like to expand on our release of June 7, when we announced our 11-year worldwide fragrance new license for the Kate Spade New York brand. Kate Spade New York, like Coach, is owned by Tapestry, Inc., which acquired the brand in mid-2017. Founded in 1993, the brand is a global life and style house with handbags, ready-to-wear jewelry, footwear, gift, home and fragrance, polished ease, thoughtful details, and a modern, sophisticated use of color are Kate Spade New York's founding principles. In fiscal 2018, that brand generated $1.8 billion in sales and operated 342 stores directly. The Tapestry umbrella gives the Kate Spade New York a strong foundation and expansive resources to support global growth. With the success we've had to date with sister brand, Coach, Tapestry has entrusted Kate Spade's fragrance to us and we intend to leverage the brand's global potential, bringing its unique and empowering feminine positioning to fragrance for women around the world. Under this agreement, we will create, produce and distribute new perfumes and fragrance-related products globally to department stores and specialty stores and duty-free shops, as well as in Kate Spade New York retail stores. At this point in time, we are evaluating the brand's existing fragrance portfolio to determine which, if any of the lines, we will continue producing and distributing. That determination should be reached by the end of this year and it now looks like we will have our first new Kate Spade scent on the market in the fall of 2020. Our other newsworthy developments relate to our first direct-to-consumer e-commerce enterprise, which will debut next month when the Lily Aldridge website is up and running. Her first scent is called Heaven, to be followed by Summit for the holiday season. All the pieces of the puzzle are in place, the website, the products, third-party fulfillment, plus an extensive advertising and promotion campaign. As we have stated before, this campaign is digitally focused, with an investment in social media buy and a targeted PR strategy to reach online industry in fragrances. Lily Aldridge will be posting for her own channels, as well as the new Lily Aldridge perfume, Instagram handle. Meeting have already taken in place with fashion retailers and we expect to see postings in their October, November books. To build buzz and excitement, we have a staff that had launched event planned for the Sunday of New York fashion week in September. Moving onto plans for the second half of this year and next. In 2020, for our largest brand, Montblanc, we will introduce a new woman's line and the flanker for Montblanc Explorer. Toward the end of this year, we will have an entirely new Jimmy Choo men's fragrance debuting. And in 2020, Jimmy Choo will add a new women's scent and we plan to enter the beauty arena with lipstick and nail polish towards the third or fourth quarter of 2020. Coach will also have a major launch of the women's scent in 2020. Looking at the U.S. side of the business, GUESS? has quickly become the largest brand within the U.S.-based operation. We have unlocked existing pillars, starting with a line called 1981 Los Angeles, where domestic distribution of the duo commenced in the spring to be followed by an international rollout in the fall. Toward year-end – this year-end, we will launch Seductive Noir, another brand extension duo, will begin domestic rollout with international distribution coming next year. For 2020, we have big plans with a new and much more upscale blockbuster women scent called Bella Vita, debuting in the spring domestically and the fall internationally. For Anna Sui in 2019, all launches thus far and those to come are brand extension, such as Fantasia Mermaid, Sui Dreams and Serenity Wish, with distribution focused throughout Asia. We have a major Anna Sui launch unveiling in 2020, with a new fragrance family called Sky. Last, we are in the final stages of development of the women's six-scent collection for Graff, the jeweler, unveiling in 2020 at Harrods in February or March for a 6-month exclusive, after which we will be offered in similar premier retail venues. So, while we have a lot on our plate, we are still in the markets for acquisitions, licenses, entire brands or – and whole companies. But synergies contemplated must be compatible with our business model and offer good growth potential and must be fairly priced. To conclude, we control a rich and diverse portfolio of brands, and we are well-positioned to drive organic growth. We have a strong balance sheet, as Russ mentioned before, should the right deal cross our path. Our global distribution network is exceptional, comprised of organizations that get product placements in the right venues, direct our advertising and promotional programs in their territory and optimize sales in the 120 countries where our products are sold. So, that's it for my part. And now, operator, I would like you to open the floor for questions.

Thank you. [Operator Instructions] Our first question is coming from Joe Altobello of Raymond James. Please go ahead.

Hi guys, good morning.

Good morning.

First question on Jimmy Choo, a little bit weak this quarter and I'm guessing a lot of it had to do with timing, but if you could just kind of walk us through why Jimmy Choo, the brand, was down 20% year-over-year?

Yes. It's really – Jimmy Choo's business is very sound, very solid. It's really only a matter of calendar of launch. We're going to have a major launch in the second half of this year. Q3, Q4, we'll introduce a product called Urban Hero. This will be the second Jimmy Choo men's line. We are very optimistic. So, there's absolutely no problems, whatsoever, on Jimmy Choo. Russ?

Yes, I just – I agree with Jean. I think it really is a matter of timing. If you remember from last quarter, Jimmy Choo was up really big in Q1. Now, it's down a little bit – it's down a bit in Q2. Overall for the year, it's not down, it's actually flat. It's up slightly. And we expect it to end the year on an upbeat as we introduce new product later on in the year.

Got it. Okay. It's helpful, Russ. And then just kind of shifting gears to Asia, it did rebound as you guys expected this quarter. Were there any impacts from the demonstrations in Hong Kong? And secondly, would you expect that market to be up for the full year? I think it's down a couple of points in the first half.

It was down a little bit in the first half. But to answer the events in Hong Kong as of now, they don't have impact in our business. We have a very important business in Hong Kong, especially with Anna Sui and Lanvin. And I think that at the end of the year, we can look at being a little up again, it will depend on the new launches that we have in the region. But we do not see, except maybe certain weakness in Korea Duty Free, but that is counterbalanced by other – by stronger duty-free business in Japan. I will say that the business is sound in Asia. Russ?

Yes. No, I agree. I think it really depends on the traction that we gained from the new product launches of Anna Sui later on in the year and Lanvin. Those are some of the biggest products that we do distribute within the Asian market. So, overall, I think we'll be – I would be expecting it to be up a little bit for the full year, but I don't see any other problems with that.

Thank you, guys. Appreciate it.

Thank you, Joe.

Thank you. Our next question is coming from Linda Bolton-Weiser of D.A. Davidson. Please go ahead.

Hi, guys. How are you doing?

Good morning.

Good morning, Linda

So, just a little question on the Kate Spade license. You mentioned you would be having your new scent out in second half 2020, so that's great...

At the end of 2020, yes.

End. Okay. So, my understanding is that there is a current licensee who is selling some products in the marketplace. Do you think you'll be able to post any sales of that existing product line in late 2020? Or do you think there's going to have to be some clear through of the inventory that they had sold into the channel? Or do you have any expectations for that situation in 2020?

Yes, I can answer on that. We are not planning to have sales of the existing lines for 2020 because we will let the former licensee sell through until first quarter or maybe even second quarter of 2020. So, we are not forecasting to have any sale of existing products of Kate Spade for 2020. But last quarter, October, November 2020, we should be launching the new line of Kate Spade New York.

Okay. Great. And just – in looking at the two brands, Coach and Kate Spade, obviously, Coach has more retail stores globally than Kate Spade, et cetera. So, can we kind of draw on analogy about the sales potential like – so in other words, Kate Spade could be something important for you guys, but maybe not the sales potential of Coach. Is that something that would be like accurate to think about that way?

It's a fair assessment. With Coach, we really have real success, over $100 million, way over our projections, way over our business plan. So, as you know, we are – we like to give a conservative projection. So, we think that Kate Spade will be definitely smaller than Coach. But we have seen from some interest in Japan, in U.K. and of course, the main market will be the U.S. So, we are confident with Kate Spade. But definitely, it will be a smaller business. I don't want to quantify. I think it's too early to quantify today how much we can do with Kate Spade. But less than Coach, for sure.

Okay. And then just on the – obviously, we all heard about the next round of tariffs effective September 1, you guys don't have terribly big exposure, but I know some components and things are manufactured in China. So, are there any additional impacts that you would be seeing from the September 1 tariffs? Or just what you've already seen and dealt with?

Okay. From what I understand – but Russ will complete my answer. From what I understand, we have taken the heat on the – with the Chinese tariffs because we import from China some components, some plastic, some metals, some carton, some components that goes to make the finished product here in the U.S. So, with the tariff of 25% is already counted and it's already in our projection. Russ?

Yes, that is correct. We have been absorbing the additional 25% tariff, either through ourselves or through some of it being absorbed by some of our vendors. The new 10% tariff is on different product that doesn't affect or doesn't increase the amount of the tariff. It's really basically going after things that have not yet been hit with tariffs. The one thing I do want to mention though, although it is flowing through our numbers and we have been able to absorb it, we have also embarked on several different plans in order to mitigate the impact of these tariffs. Let's also keep in mind that most of the finished product that comes in through the United States operations is actually re-exported. So, we've put together many different plans, product can actually avoid being brought here into the United States. And that has helped us also mitigate some of the effect of the tariffs.

If people are interested, Russ will be able to give you more details about a new warehouse that we're going to have in the free zone in Shanghai, also some feeling that we are going to make in Turkey for some promotional or Christmas gift set. So, we have taken action and we have a full plan. But for sure in 2019, this 25% tariff is costing the company a couple of millions extra in cost of goods.

Okay, thank you so much.

Thank you, Linda.

Thank you. Our next question is coming from Stephanie Wissink of Jefferies. Please go ahead.

Hi. This is Ashley Helgans on for Steph Wissink. Thanks for taking our question. Your guidance implies a 3-point set down in the back half. Is this related to purchase order trends, increased competition or function of conservative? Thanks.

I didn't hear all the question, I'm sorry.

Basically, the question was basically an implied slowdown in sales in the second half as compared to the first half. To answer the question, the biggest impact in connection with sales throughout 2019 is foreign currency effect. We are in an environment today, where the dollar is extremely strong, especially, compared to the earlier parts of 2018. As I mentioned at the very beginning of our call, for the second quarter alone, we're comparing a rate of 1.12 currently, compared to last year of 1.19. As the year went on at 2018, the rate got a little bit stronger. However, today, we are in an environment where the rate is now down to 1.10, 1.11. So, that is really what's implying the perceived slowdown in our sales. When we look at the numbers in constant dollars, they are lot better than the absolute dollars imply.

Okay, great. Thank you and congrats on a great quarter.

Thank you so much. Appreciate that.

Thank you. Our next question is coming from Hamed Khorsand of BWS Financial. Please go ahead.

Hi. Just a couple of questions. First off, are you changing any of your ad approach given that you have a broader product line this year beyond just Lily Aldridge that you're doing more social media on, but more of your legacy brands? Are you changing up any of your ad or marketing approach?

The answer to – I'll answer quickly. I think Jean can probably go into more detail, but absolutely, especially in certain markets around the world, like the Asian market, we are doing a lot more digital, a lot more social media type of advertising dollars in lieu of the standard magazine, the historic scent strip type of advertising.

I didn't hear well the question. So, it's about how much digital versus regular advertising?

Yes, trends. Are we seeing any change of trends in how we're spending money on advertising?

Our budget for digital between Paris and New York, for all divisions combined, will more than double this year comparing to last year. And I will expect next year that digital will become the main medium of media spending.

Okay. Then another question is. There are some brands like the Lily Aldridge where you don't have any revenue existing right now. So, does that mean that you're compensating from another brand to get to the 21%? Or is it – are you just assuming that Lily Aldridge generate some sort of revenue that you can keep at spending at 21% of sales?

Yes, the 21%...

Stop me if I'm wrong, Russ, but I will say, with or without Lily Aldridge, we will be at this level. Some brands will spend a little more. It depends of calendar of launches. Some brands will spend a little less. But as I said in many calls, when we see the business is good, we tend to invest more in advertising in order to gain market share faster and quicker. So, our brands are performing well in many markets, Montblanc, Lanvin, Coach, GUESS? So, we will continue to spend at this level.

And my final question is that, you've used the word major a few times when you're referring to next year's launches. Should we assume that when you use major, it will be more of a revenue benefit versus something of a flanker product coming into market?

Definitely. When Jean uses the word major, he is usually – we are referring to the brand itself, the size of the brand and whether or not it is a new fragrance family as opposed to a flanker or an extension. So, as we go into 2020, as an example, we talk about the new Coach line for early 2020. We talked about GUESS? being a blockbuster for Bella Vita, which is also geared for 2020. So, that's kind of what we are getting at in connection with major – with the word major.

Alright, thank you.

Thank you, Hamed.

Thank you. At this time, I would like to turn the floor back over to management for closing comments.

That's great. Thank you, operator. And once again, thank you all for turning in to our conference call. As usual, if anybody does have any further follow-up or questions, or as even Jean mentioned, if you want further clarity with respect to some of our plans on mitigating some of the additional tariffs that we're absorbing, you can always contact me in my office. Thank you so much for joining, and have a great day.

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines at this time, and have a wonderful day.