Inter Parfums, Inc. (IPAR) Q1 2022 Earnings Report, Transcript and Summary

Greetings, and welcome to the Inter Parfums First Quarter 2022 Conference Call and Webcast. At this time, all participants are in a listen-only mode. A brief question-and -- will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I will now turn the call over to 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 first quarter conference call. As always, 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 calls. 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 for the year ended December 31, 2021, and other reports we file from time to time with the Securities and Exchange Commission. We do not intend to and undertake no obligation to update the information discussed. When we refer to our European-based operations, we are primarily talking about sales of Prestige Fragrance products, managed through our 73% owned French subsidiary, Inter Parfums SA. When we discuss our U.S.-based operations, we are primarily referring to sales of Prestige Fragrance products, managed through our wholly owned domestic subsidiaries. Moving on to today's business. You may recall that on our year-end conference call, Jean mentioned that sales in January and February were well ahead of budget. Well, March was more of the same. And as a result, 2022 first quarter net sales rose 26% over Q1 2021, which, by the way, was 37% better than Q1, 2020. For European-based operations, gross profit margin was 66.8% and 65.5% in the first quarters of 2022 and 2021, respectively. The margin gain in 2022 is primarily the result of the stronger US dollar. For US operations, gross profit margin was 53.9% and 53.2% in the first quarter of 2022 and 2021, respectively. With that improvement due to the significant increase in sales, which allowed us to better absorb fixed costs such as depreciation, mostly of tooling and point-of-sale expenses. Jean will address the array of supply chain issues and what we have done to mitigate their impact. But our ability to transport goods and related cost increases have and will continue to have a negative impact on sales and gross profit margin into the foreseeable future. And yet, it's a little hard to complain when sales and earnings are at record levels. For European operations, selling, general and administrative expenses represented 37.9% and 37.2% of net sales in the 2022 and 2021 periods. For US operations, SG&A expenses represented 41.5% and 39.9% of net sales in the 2022 and 2021 periods. The increase in both segments relate to our investment in promotion and advertising. In the current first quarter, we spent 13.6% of net sales on promotion and advertising versus 11% in the same period last year. But even at 13.6% of net sales, we are still below pre-pandemic levels. In the first quarters of 2019, 2018 and 2017, promotion and advertising represented 15.4%, 15.6% and 16% of net sales, respectively. As compared to last year, we are in a better position to allocate our advertising and promotion spending, such that on an annual basis, we expect to be at approximately 21% of net sales. Our operating margin was approximately 24% for both the 2022 and 2021 first quarters. Our consolidated effective tax rate was 24% and 27% for the first quarter of 2022 and 2021, respectively. That difference is due primarily to the lower tax rates in France. After backing out minority interest, we earned $1.10 per diluted share, which was 26% ahead of last year's first quarter. At March 31, inventory rose to $227 million, up from $199 million at 2021 year-end. Better for sure, but not yet ideal. We closed the quarter with working capital of $484 million, including approximately $265 million in cash, cash equivalents and short-term investments. And we had a working capital ratio of approximately 2.9:1. The $125 million of long-term debt relates primarily to the acquisition of our new Inter Parfums SA corporate headquarters, which is now fully operational. Yesterday, we affirmed our 2022 guidance, calling for net sales of $975 million, resulting in $3 per diluted share. However, we will be in a better position to revisit the subject of guidance once the lockdowns in China are lifted. Our guidance comes with the usual caveats regarding the dollar -- the euro-dollar exchange rate, the COVID-19 pandemic and, of course, the geopolitical situation in Eastern Europe. Now I will turn the call over to Jean.

Thank you, Russ, and good morning, everyone. We are benefiting from a robust fragrance industry across the globe. North America, our largest market, achieved sales growth of 12% despite this IT problems by our U.S. distribution subsidiary. Comparable quarter sales in both Western Europe and Asia Pacific, our second and third largest markets, increased 41%. Our sales in the Middle East increased 27% and in Central and South America, sales rose 38%. With most of our shipment made early in the first quarter, sales in Eastern Europe rose 13%. Finally, Travel retail is making a slow but steady comeback despite stops and starts stemming from regional pandemic recurrences and lockdowns. Strong performance of legacy fragrance and several product launches, notably Kate Spade, Sparkle, Montblanc Legend Red, Coach, Wild Rose and GUESS Do More contributed to the increase in sales. Of course, incremental sales of Ferragamo, Ungaro, MCM and Moncler products factored into our top line growth. First quarter sales in North America will have been considerably better had there not been a bottleneck at our US distribution subsidiary, following a change in the software by its logistics partner that resulted in shipping related issues. About half of the orders that we couldn't fulfill in the first quarter are being shipped in the second quarter. Our big spend in advertising and promotion in the final quarter of 2021 has been paying dividends in this current year. Once again, about 80% of our investment in promotion and advertising is devoted to digital ads, social media, like Instagram, Snapchat, Tik Tok and WeChat, influencers in the beauty, music, acting and sports field as well as TV and billboards. As I mentioned on our last call, we are doing more business on Amazon, and we have devoted advertising dollars to that effort and we are very pleased by that return on investment. Our multiple engines of growth have enabled us to capitalize on the heightened demand for fragrance with sales increasing in both brick-and-mortar and e-commerce revenues. Explanation for the surge in fragrance industry sales growth around about fragrance are increasingly recognized as an affordable luxury. Scent like fashion is an avenue for self expression, more men are buying and wearing fragrances. Social media and the growing number of influencers are driving fragrance popularity. During the high of the pandemic, the homebound Gen Z population became infiltrated with fragrance and that has not diminished. Sales of more expensive, higher concentration [indiscernible] and luxury brands are growing rapidly and of course, China, China, China. And you -- I'm sure, I will answer your questions on China. Much is being returned above the lockdowns in China and yes, these closures have been severely hampering sales and exacerbating supply chain problems. That said, the fragrance opportunity in China is immense with only 9% penetration of urban women and 3% of urban men, that is why much of our big spend in the final quarter of 2021 was focused on China. We have directed much of our attention on the GenZsumers who are looking for the most premium luxury and expensive brands. For us, that means, Ferragamo, Moncler, Jimmy Choo and Van Cleef are in great demand. And thanks to a strong January and February sales of our European-based brands almost doubled in China in the first quarter then came lockdowns in dozens of cities with guarantees restricted trucking services and factory shutdowns. Our distribution operations in Shanghai, ground to a halt. Nothing came in, and nothing went out. Our sales in China in end of March and April and thus far in May have been reduced severely and so has our advertising. Hopefully soon, lockdowns will lift, and we look for business to steadily rebuild. Moving on, while problems still persist, the actions initiated in 2021 have gotten us beyond the critical point in the supply chain saga. We have been carrying more inventory overall, sourcing similar components from multiple suppliers are doing well in advance of need, utilizing the resources of our new Italian subsidiary, producing closer to where products are sold, all of which have reduced our sourcing and production challenges. I'm very pleased to we got that to a great extent, products consumed in the US are being produced in the US and our Christmas sets, for instance, that will be sold in Europe are being made in Europe. As we relayed on our prior call, we are upgrading our inventory management systems and brought on more staff to address this crucial function. And now I will turn to the inflation. The prices of components, including glass, cardboard, wood, aluminum have been rising. Add to that, dramatically higher energy and shipping costs. At the start of the year, we raised prices between 3% and 5%. We hadn't raised prices in a number of years. So for the most part, and until recently, we got minimal blowback from distributors and retailers that is changing, and we are facing greater resistance now. What they and we are finding is that consumers who can pay more, do so, but those who cannot forgo the purchase or make a more affordable selection. The inflation PRL is a major concern, and I don't look forward to our next price increase in the fall. While some of our customers have tried ordering ahead of the price increase, we've done our best to limit holding. We don't want to overstock customers so that goals pile up and sit in inventory. It is hard to speak about the business implications of the tragic war in Ukraine with outstanding heartless, but it's I must. Needless to say, the Russian invasion of Ukraine has negatively impacted our operations in both countries as we adhere to the regulations and sanction, which vary from country to country. Having made shipments to Russia in the early part of the first quarter, we protected most of our Russian accounts receivables with credit insurance and payments in advance is a business condition imposed on our Russian distributor. Despite all the uncertainty stemming from inflation, the war in Ukraine and the temporary China lockdowns, supply chain obstacles, 2022 is poised to be another record year. The official launch of scents for Moncler, Moncler Pour Homme and Moncler Pour Femme has begun, and the rollout will ultimately reach 3,000 doors. During the second quarter, a major advertising and promotion campaign is being activated to support this rollout, focusing on the US, the UK and Japan. We also have major men's fragrance launches for Coach with Open Road and for Boucheron with Single. But most of our new products are brand extensions, including Jimmy Choo Man Aqua, Lanvin Mon Éclat. Our timing is good as flankers and extension put less strength in the supply chain because they often use many of the same components as their predecessors. We are very excited about the Dona Karan and DKNY fragrances joining our portfolio starting July 1. We will be buying inventory from Estée Lauder, the former licensee. So we should be able to hit the ground running. We have assigned seasoned brand managers and the new products debuting next year are under development. Both of these brands have strong legacy sense. If you saw Marie Claire’s April 2022 issue, Be Delicious made its list of the best fragrance of all time, while in February of this year, Women’s Wear Daily included [indiscernible] by Donna Karan in its list of the greatest fragrances of all time. The hunt for additional brands is ongoing. We have two types of targets, both with established businesses and start-up enterprises with great potential. We are also calling our portfolio, allowing smaller, less promising licenses to expire. We will talk, I'm sure, during your question about the guidance that we have decided to maintain. But I think to always end our conference calls on why Inter Parfums is an attractive partner for brand owners. Maybe the consistent service message overrides its redundancy. Here it goes. As a pure playing fragrance, we have a know-how, talent and commitment necessary to grow a licensor’s fragrance business. That translates to higher royalties and greater brand recognitions for the brand owners. Our distribution network encompasses now 120 countries, each with proficiency in their local markets. Inter Parfums also has a very strong balance sheet and a motivated management ready to take action when the right opportunities arise. We've now got even greater bandwidth with our new Paris headquarters and operations in France, Italy. Now operator, you can open the lines for questions.

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

How are you doing?

Great, Linda. Thank you.

Good. So can you just – you talked a little bit about China. And it sounds like you are being impacted. Sorry, if I missed that, but did you actually say what China, how it performed in the first quarter or in March, like how much it was down in March. Can you give us some sense?

Yes. In March lockdown more than 60%, in April, we are down also double digit -- high double digits. We do not think that, it's going to improve before end of May. But again, I'm still optimistic because I know that when they reopen, they're going to need a lot of merchandise. So we have this inventory ready. Our warehouse in Shanghai, we have a distribution center in the duty free zone in Shanghai is full of products. We have also products on – in transit to Hong Kong. So as soon as China reopens, I think we'll be back to a strong business. So we don't drop the ball, but it just a setback, because of this lockdown.

Right. I understand. And roughly what percent of sales is China for you normalized? Is it like less than 10%?

In 2021, China represented approximately 4% of sales. So that's somewhere around between $36 million to $40 million.

Okay. That's helpful. And then, is there any way to quantify how much the Ferragamo and Ungaro sales contributed to growth in the quarter, like what portion of the growth rate?

Yes. I'm sure, Russ, maybe look at the question – yeah go ahead, Russ.

What I was going to say is we had indicated that Ferragamo in its heyday was generating sales of somewhere close to $80 million, and that got cut in half, which is one of the reasons why we were able to take over the business itself. So that would mean that, the business overall would be somewhere around $40 million, $45 million or so. And it's pretty much right on target during the second quarter. Our sales were very, very close to that $10 million will have a little over the 10 million mark.

During the first quarter.

In the first quarter.

Okay. Okay. Thank you. And then finally, just this updating of your inventory management system that you mentioned. Can you just describe what that entails? And do you have to make like duplicative inventory for safety stock? And what's the timing of this implementation?

This implementation – go ahead, Jean.

No, no, go ahead.

The implementation is not just the inventory management system, it's our entire ERP system. This has been ongoing now for almost a year. We are upgrading to a cloud-based system and using third-party programs to assist in inventory management, warehouse management systems, scanning systems and things of that sort for our warehouse. If a project is, as I said, it's been going on for well over a year. We expect to transition it probably sometime between either the third quarter or at year-end for 2022. It's basically revamping all of our systems, not just inventory management. But inventory management is really the impetus as to why we entered into this endeavor.

Okay. Thank you so much. I'll pass them now. Thanks.

Thank you.

Thank you, Linda

[Operator Instructions] Our next question comes from Stephanie Wissink with Jefferies. Please proceed with your question.

Hi, good morning. This is Grace on for Steph. Thanks for taking my question. Wondering if you can highlight the pacing of launches for the remainder of the year? And then tangentially, how should we be thinking about the quarterly cadence from here? Thank you.

Yes, of course, we can do that. So for Q1, you remember that we launched -- we had a launch for three brands Coach, Moncler, of course, being number one, Moncler for men and for women. We'll continue with more men's rollout, basically GE shoe man, Aqua. And after that, in the -- starting July, you're going to have the takeover of Dona Karan and DKNY. So it's not a launch, but it's a new business for us, and we're going to start quite strong because we are taking over a worldwide distribution starting July 1. And the rest of the brands will have what we call flankers. So it's a good year of -- it's a good mix of blockbuster and flankers.

That’s helpful. Thank you/

Thank you. Our next question is from Hamed Khorsand of BWS Financial. Please proceed with your question.

Could you just talk about how the consumer is reacting with -- especially in Europe, with the weaker euro and how if you're adjusting pricing there to compensate for the weaker euro?

The customer in Europe not -- doesn't have to react really because we have not changed our retail price in euro. So even though the dollar is much stronger, we have not changed retail price yet. But it's true that American products for our distributors will be a little bit more expensive. That's why we'll have to do a second wave of pricing. We have to be careful with price increase. I think it has its limits. There are certain brands that is more acceptable than others for Boucheron or Van Cleef or [indiscernible] to have a $5 retail price higher, it's not a big deal. But when it comes to more democratic brands like GUESS or Abercrombie, I think we have to be disciplined and be careful because we want to keep this customer. We don't want him to go and buy something else. So we are monitoring very, very carefully, and we are looking at it very selectively. We don't do the same thing for everywhere.

Yes. And then my other question was, is the current macro environment making you change any of your plans for next year as far as the release schedule is concerned?

No, no. We are not changing our plans. Actually, we kept everything the same. We had -- again, we had a big setback with China, but we know that it's temporary. We have not decreased our inventory. We have not decreased, for instance, the launches and the rollout that we'll have in China in 2023. So, no, for us, even though we had a setback at the end of March in China, even though we cannot ship any -- I mean, cannot ship a lot of products in Russia, of course, in Ukraine now, we have maintained our sales guidance. And like Russell said in the press release and earlier today, we will, I hope, revisit the guidance for profit and sales towards June and July when we are sure that China has reopened.

Okay. Thank you.

Thank you.

Thank you. There are no further questions at this time. I'd like to turn the floor back over to management for any closing comments.

Thank you. All right and thank everybody for tuning in today for our conference call. Just a quick reminder, I will be presenting at the Jefferies Consumer Conference, which runs from June 21st and 22nd in Nantucket. Thank you, Steph, for the invitation and how nice it will be to be in-person at the event. If any of you have any further questions, please contact me by e-mail. Stay well and stay safe. Thank you again.

Thank you. This concludes today's conference. You may disconnect at this time. Thank you for your patience.