Interparfums Inc (IPAR) 2023 Q2 法說會逐字稿

Greetings, and welcome to the Inter Parfums 2023 Second Quarter Earnings Conference Call and Webcast. (Operator Instructions) As a reminder, I'd like to remind you that this conference is being recorded.

At this time, I'd like to turn the call over to the Vice President at the Equity Group and Inter Parfums Investor Relations representative, Karin Daly.

Thank you, Diego. Joining us on the call today will be Chairman and Chief Executive Officer, Jean Madar; and Chief Financial Officer, Michel Atwood. On behalf of the company, I would like to note 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 may be found in the company's filings with the Securities and Exchange Commission, under the headings Forward-Looking Statements and Risk Factors in their most recent annual report on Form 10-K and subsequent quarterly filings on Form 10-Q. Forward-looking statements speak only as of the date on which they are made, and Inter Parfums undertakes no obligation to update the information discussed.

It's now my pleasure to turn the call over to Jean Madar. Jean, you may begin.

Thank you, Karin. Good morning, everyone, and welcome to our second quarter conference call. Most of us are already aware that the fragrance industry is booming, and we are pleased to have seen a continuation of that momentum during the quarter. With our increasing market share, we continue to be optimistic in our upward trajectory. In fact, we continue to fire on all cylinders to meet the needs of our distributors and retailers to ensure that we not only attract but also retain both the new and very experienced consumer.

On a consolidated basis, net sales increased 26% in the second quarter. This comes on top of a robust prior year period in which we had already experienced 18% growth. Beginning with our business by region. For the second quarter, our two largest regions, North America and Western Europe increased net sales, 25% and 26%, respectively. In Asia, despite challenges in China, we are doing well, and we grew 17%, mostly thanks to a very strong business in Southeast Asia and Australia. We also experienced significant growth in other regions, including Eastern Europe and the Middle East, up 122% and 23%, respectively.

We continue to see renewed life in our travel retail business, particularly in the duty-free sector as demand for luxury and premium brands increased and digitalization of the retailing process offered a boost in sales. With respect to our European-based operation through our 72% owned French subsidiary called Interparfums SA, net sales increased 19% and primarily driven by our top-performing brands, Coach, Jimmy Choo and Montblanc, but increased by 28% for Coach, 21% for Montblanc and 15%, respectively, compared to the prior year. Both Jimmy Choo and Montblanc surpassed $100 million in sales through the first 6 months of 2023.

Montblanc sales were strong at $55 million in the quarter, $116 million for the first half of 2023. Growth drivers included the continued outperformance of the Montblanc Legend lines and the growth of the Montblanc Explorer line, which was recently reinforced by the introduction of the Montblanc-Explorer Platinum extension.

Jimmy Choo sales were also formidable at $46 million in the quarter, $109 million for the first half of 2023. I want Choo continue to be an international success after launching in 2021. Sales were also boosted by the debut of two flankers, Jimmy Choo I Want Choo Forever, and Jimmy Choo Rose Passion which came to market in late 2022 and early 2023, respectively.

Coach sales experienced steady growth in the quarter as nearly all lines for both genders saw increased demand in addition to the new fragrances, Coach Love and Coach green. Other growth drivers were from our own brands [Lanvin], which achieved modest growth in the quarter without any new additions. And Rochas, which saw strong sales in Eau de Rochas The timeless fragrance and the re-launch of Rochas Girl Life, an eco-responsible line.

On the subject of Rochas, you may have read that Interparfums SA will now manage all the marketing and communications and licensing activities for both the fashion and the beauty business.

Moving on to our U.S.-based operations. Our wholly owned domestic subsidiaries. Net sales increased 42% on top of a healthy 69% growth during the second quarter of 2022 from the continued success of our brands. Guess fragrance sales, which increased 30% in the quarter and across all geographies, more than made up for the challenges experienced in the first quarter from the ERP implementation. The second quarter performance in Guess was driven by the sales of our newest pillars, Seductive Blue and Warmer Aqua.

Touching on the ERP implementation. We are in much better shape today while we still have to continue to train our teams and have many additional enhancements we would like to implement to fully capture the full benefits of a new system, we see light at the end of the tunnel. Our teams are working with external providers and subject matter experts weekly to ensure we remain on track. I want to take this opportunity to thank the organization for their unwavering support and hard work during this critical transition.

Looking at Ferragamo Fragrance, sales were strong, which we recently enriched with sisters scents, Signorina and (inaudible) collections, I would like also to share that (inaudible) Magazine selected Ferragamo Signorina Libera in its favorite new perfumes of 2023. Noting the irresistability of a stylish feminine inspired bottle design. And finally, the combination of Dona Karan and DKNY franchises as in just 1 year's time become our second largest U.S.-based brand and experienced momentum in the quarter.

Our brands are in high demand, and we have an exciting lineup of extensions across many of our brands and during the second half of the year. As previously disclosed, Abercrombie & Fitch will be joining our portfolio. And later in the year, we expect to launch GUESS Bella Vita (inaudible), Karl Lagerfeld and Van Cleef & Arpels (inaudible).

Moving on to other key themes in the fragrance industry. On the last call, I mentioned my most recent visit to China. And since then, the momentum has continued at the same pace, and we continue to see signs of incremental improvement. We anticipate modest sales growth in China for the back half of 2023 and into 2024, and we'll continue to be patient as China at this moment is a very small portion of our book. We'll continue to monitor the region. And when the time is right, we will be ready and able to deploy our expertise in order to take advantage of this immense market opportunity.

Other notable topics, though both no longer a concern are supply chain and inflation. Supply chain disruptions are mostly behind us, and the inflationary impact on components has generally leveled out. A few comments on the competitive landscape before turning the call over to Michel, our CFO.

Competition is favorable for us today, and we are all well positioned to continue to execute on selective and strategic acquisitions as they become available. Most recently, in July, we entered into an exclusive worldwide fragrance license for the Roberto Cavalli brand which will be managed by our extraordinary team in Italy. Our enthusiasm for these acquisitions stems from the sophisticated, luxurious and flamboyant design of Roberto Cavalli. We believe that Cavalli fragrances encompass maximalism in this world of minimalism. And with its recognition in Europe, in the Middle East and in America we believe it can be a globally recognized name. So it's to appeal to contemporary customers that are both young and young at heart. We are proud to be the licensee and welcome the distinct name to our current portfolio of brands. Going into 2024, we expect to introduce two brand extensions followed by a blockbuster in 2025.

Now I will turn it over to Michel to review our financial performance. Michel?

Thank you, Jean, and good morning, everyone. Before starting, I just wanted to maybe make a small correction. I think in Jean section, he talked about the growth of Montblanc. The growth of Jimmy Choo is 21%, and the growth of Montblanc in the quarter is 16%.

So quickly, I'm going to touch on FX. Obviously, as you all know, FX had a major impact in 2022. But so far this year, it's only been marginal. For the second quarter of 2023, we had a favorable 1.3% year-over-year impact on net sales, while it has had an adverse 0.5% year-over-year impact for the first half, so relatively marginal.

Moving on to gross profit. On a consolidated basis, gross profit increased 23% to $188 million during the quarter. As a percentage of sales, gross margin decelerated though, to approximate -- by approximately 190 basis points. As you've seen in our press release, while we've registered scale benefits from our sales growth, our price increases and favorable brand and channel mix. This was offset by a onetime conservative inventory reserve of $7 million related to certain underperforming brands within our European operations, for which we have built inventory during the pandemic to protect service level. Excluding this onetime charge, gross margins would have expanded by 28 basis points compared to the prior year period.

On a year-to-date basis, gross margins are flat versus the prior year period before adjustments. But net of adjustments, we actually would be down by 110 basis points. For operating based -- for European-based operations, gross profit margin was 63% and 65.6% of net sales for the 3 and 6 months ended June 30. And that is down 390 basis points and 130 basis points compared to the corresponding prior periods. This obviously includes the inventory adjustments described just before. Excluding this onetime adjustment, gross margins for European-based operations would have contracted by 40 basis points in the second quarter, but expanded on a year-to-date basis compared to prior year period as we took pricing and enhance the brand and channel mix.

For United States-based operations, gross profit margin was 57.2% and 57.4% of net sales for the 3 and 6 months ended June 30, and that is up 290 basis points and 330 basis points, respectively, as compared to the prior year periods. The significant margin expansion stems from a number of factors, largely due to price increases we took early 2023. Favorable brand and channel mix and obviously, a higher portion of our higher-priced fragrances being sold directly to retailers as opposed to third-party distributors.

As stated on the last call, our margins has only been moderately affected by our inventory cover and FIFO accounting. Another thing to note is that the significant increase in sales in the first half of '23 allowed us to better absorb fixed expenses, such as depreciation and point-of-sale expenses as compared to prior period. All of these have obviously helped with this margin expansion.

Now turning to SG&A. On a dollar basis, SG&A expenses increased 23% to $133 million for the quarter. However, given our 26% sales growth, SG&A improved by 120 basis points as a percentage of net sales from the prior year period. For European-based operations, SG&A represented 45.1% and 38.9% of net sales for the current second quarter and first half, respectively, as compared to 47.4% and 42.4% in the respective prior year periods. For U.S.-based operations, SG&A represented 39.7% and 41.3% of net sales for the second quarter and first half, respectively as compared to 37.8% and 39.5% in the same period last year. The increase in SG&A for our U.S.-based operation as a percentage of net sales is primarily the result of increases in promotion and advertising as well as the annualization impact of the structural investments in our U.S. operations that we have made throughout 2022 in order to support the new licenses. This represents about $7 million for the first half of 2023. Royalty expenses are included in SG&A and which generally are in line with the prior year period at 7.8% for the quarter.

Moving on to promotion and advertising, which is an integral part of our industry. We continue to invest heavily to support new product launches and to build brand awareness and anticipate on a full year basis, promotion and advertising spend will approximate 21% of net sales. For the quarter and 6 months ended June 30, promotion and advertising expenses represented 17.6% and 14.5% of net sales. As a normal order of business, promotional advertising generally picks up in the back half, especially in the fourth quarter due to the holidays.

Now moving to cash. We closed the second quarter with working capital of $480 million, including approximately $187 million in cash and cash equivalents and short-term investments, maintaining our working capital ratio of 2.4:1. We continue to see working capital growing in lockstep with our growth. Accounts receivable is up 18% from year-end 2022 and the balance is reasonable based on second quarter 2023 record sales levels and reflects strong collection activity as days sales outstanding was 68 days, down from 76 days in the corresponding period of the previous year.

Inventory levels as of June 30 also increased 23% from year-end 2022 in support our overall sales growth and the holiday season. As you know, our strategy is to carry more inventory overall to protect service levels especially in a volatile context like we had. Our long-term debt totaled $139 million at June 30, primarily due to the Interparfums SA headquarters acquisition and the acquisition of the Lacoste trademark.

As we reflect on the positive momentum of our brands and the overall fragrance market driving our strong first half, we are confident that we can achieve another excellent year especially with clear visibility on future orders for the second half and in consideration that supply disruptions are mostly behind us, as Jean pointed out. As such, we have increased our full year 2023 guidance to approximately $1.3 billion, in sales, resulting in net earnings of $4.55 per diluted share, up from a previous guidance of $4.25 per diluted share and 20% versus 2022.

With that, operator, please open the line for questions.

(Operator Instructions) Our first question comes from Ashley Helgans with Jefferies.

So the first question, I know that this will be your first year having gift sets in a couple of years. Just how should we think about Q3 versus Q4 sales? And then any color you can give us on the brands that were included in the inventory write-off?

So I mean, obviously, as you know, last year, we had some supply challenges on gift sets and some of the gift sets move from Q3 to Q4. This year, we are expecting to have more sales in the third quarter of gift sets and obviously less in the fourth quarter. So as we look at our growth for the subsequent quarters, we are seeing more growth in quarter 3 than quarter 4 as we look to the balance of the year in terms of growth rate.

In terms of the inventory write-off, I think you've seen the communication from our colleagues at Inter Parfums, all of the brands are growing quite significantly. As you can see, there is -- we've had some challenges on Moncler, pretty large growth in the base. And what we're seeing right now is a bit of a slowdown of that growth. So when we assessed our inventory levels, we were prudently decided that we needed to write down any inventory that we had that was beyond 2 years. That doesn't necessarily mean that we're going to destroy it. Obviously, we have all intents to bring the brand back on track. And and then hopefully manage to consume some of these, but we wanted to be prudent and reserve what we felt was right from an accounting standpoint.

Our next question comes from Korinne Wolfmeyer with Piper Sandler.

So I'd first like to touch on kind of the margin outlook for the remainder of the year. And you did give a little bit of color. But I think we've previously talked about 18% operating margin target this year and kind of similar going forward with a little bit of expansion. How is this inventory write-off or the gross margin hit that you saw this quarter impacting that outlook, if at all? And is that still kind of the right target to look at as you look at the out years as well?

Yes. Korinne, maybe I'll take that and then Jean, you can chime in. Right now, we're still projecting an operating income of about 18% that is consistent with our guidance.

Got it. Helpful. And then just lastly on the increased A&P spend. As you think about the guidance for the remainder of the year, how much of that top line is baking in some benefit from your increased advertising spend? And then how are you thinking about the ROI of these investments, both near term and longer term?

Yes. I think we regularly get these questions, right? I mean the way our business model works is you're basically selling in inventory ahead of certain key consumption periods. Obviously, there are a number of key consumption periods like Mother's Day, Father's Day, Valentines Day and holidays that are -- happen across the world. The big one obviously is the holiday season in December.

And generally, what happens is we sell in the inventory, and then we drive consumption in the store through strong advertising and promotional expenses. If you don't do that, essentially, what happens is your inventory doesn't get consumed and you end up taking it all back in the subsequent quarter or if things go well, which is what we've been experiencing now for a couple of years is that advertising drives strong sellout in the stores and then our retailers reorder in January, February and March. So really, I mean, that's how we really typically measure the ROI.

Now in terms of where we spend, and I'll let Jean chime in after this, we typically obviously spend where we have the best ROI. We've shifted a lot of our expenses towards digital media. We selectively invest in outdoor where it makes sense. But generally speaking, obviously, we look at ROI for all of our expenses and we try to invest where we know that we have experience and risen strong results in terms of return on investment.

Absolutely. Yes. Digital is a big chunk of our spending. And I will say it's split between the two largest market, the Americas, North and South, and Europe. And to go back to the margin, the 18% is absolutely feasible. We think that even though we had this -- we took this reserve for inventory, we'll be able to do this 18% margin.

(Operator Instructions) Our next question comes from Hamed Khorsand with BWS Financial.

So my first question was, could you just provide a little bit more granular level of what you're seeing as far as consumer demand goes -- is this really all being driven by the new products that you've been releasing over the last 6 to 12 months? Is this is a growth driver really more about consumers just having more options to use at home and then what your expectation is on the consumer, if they're tapped out as to how many fragrances they have at home?

Yes, it's a very good question. I will try to answer. What we see in our lines, we see growth in our existing lines and also through innovation. So products that have existed for more than 24 months are still growing, especially for our largest brands the Coach, Montblanc, Jimmy Choo, Guess and DKNY, Donna Karan, and we said that -- and I will say that on top of this growth, we have growth coming from innovation, new products, new lines, flankers, blockbusters, et cetera. That's why we're having such a growth, which is bigger than our competition and bigger than the market. And we do not see -- we didn't see it in July. We didn't see it in the first week of August. We do not see any sign of slowness.

At the contrary, things are continuing to be quite good. We are shipping on time this year our gift sets. So we have started to send them worldwide. So we'll have a longer sell-through for our gift sets. And like Michel said, because we start stronger advertising in end of third quarter, beginning of fourth, we expect to have a good sell-through so we can generate new businesses in January and February. So things are doing quite well.

Maybe just to build on -- Jean on this. So first, the innovation, if well designed and well executed, the flying curves are intended to hero the -- at the halo on the rest of the lines, all right? And this is one of the reasons why our innovation is working, but also our historical lines because the innovation and the flankers are designed to do that.

On your question around consumption, again, we don't get a lot of regular data, but what we are seeing very clearly, and this is resulting in significant market growth. If you look at NPD data, for example, in the U.S., June NPD data was again very strong and the market is up 11%, it's up 13% on a year-to-date basis. And what we're seeing really is there is clearly an increase in penetration in the category. There are new people that are entering the category. Historically, the U.S. was under-penetrated versus Europe. We're seeing that penetration growth. And we're also seeing more usage. So coming to the point you're asking before. More fragrance, more fragrance usages, people may be wearing a fragrance in the morning. Now also wearing one in the evening or vice versa. So all of these things are driving the category growth, and we believe they're sustainable. And we're not seeing any slowdown at this point in time.

And I would like to add also that we've seen a very strong trend with our men's fragrance business. Men's, as you know, is a smaller part than the women's business, but it's growing at a very fast pace. Men's used to have only one or two fragrances. Today, they are willing to try more than one or two, and we see it in our numbers.

And could you just talk about the Q3 and the [Haley] inventory build season at the retail level, is it any different than prior years that you've seen as far as the -- how the retailers are reacting?

I can try. Retailers are -- as you know, retailers are looking at their inventory very carefully. Most of them are on the EDI with us. So they will order only based on the sale through in order not to create a huge backlog and we do not see any problems of too much inventory or -- maybe at the contrary, I think they are quite light just before the season. And this is, I would say, in the U.S. department stores and also in Western Europe. Germany, France, Spain. Michel?

Yes. I was -- nothing really more to add. I think what we are seeing is, typically, last year, what happened was gift sets were because of the supply challenges because that weren't available. So I think a number of retailers weren't able to be fulfilled, and we saw probably -- more gift sets arriving in the second quarter -- the fourth quarter and basically being sold through the fourth quarter. So hopefully, with supply chain problems abating, we should start to see -- we are starting to see earlier purchases and we should see have a longer holiday season to sell the sets through.

Our next question comes from Linda Bolton-Weiser with D.A. Davidson.

So just a question on gross margin. I guess with all the gift sets being more sales this year than last year in the third quarter, gift sets tend to be a little lower gross margin, plus you have the stronger euro, which I think would hurt your gross margin. So I'm sort of wondering if you can give a rough outlook for gross margin specifically, like in the second half, do you think it can be up year-over-year or flat year-over-year? Is there any kind of rough way we should be thinking about gross margin in the second half of the year?

Yes. So right now, if you look at the first half, right, gross margins have been roughly flat, and I explained some of the reasons and ahead of -- during our prepared remarks. Right now, we are projecting for a lot of the reasons you've explained. We are projecting some erosions in our gross margin for the second half. One, we have obviously a bigger proportion of our business with gift sets. The other aspect as well is, as you know, our U.S. operations is growing more rapidly than our European operations and our gross margins are typically lower in our U.S. operations with -- so those are some of the factors that are going to come into play. There's also obviously some of the cost increases that are going to continue to make their way through our costs -- through our P&L. So those are some of the factors. So we right now, we're modeling a slight deterioration in gross margins for the second half of the year.

And by erosion, you mean on a year-over-year basis, is that correct?

Yes. year-over-year. Obviously, gross margins, I -- yes, absolutely.

And then could I just ask also about inventory. So it's creeping up a bit despite the fact that the component shortage situation is getting better. So I guess I'm just wondering, like, are we running a risk of another inventory write-off in the future as your inventory creep up here? Or maybe you can just talk about -- are you targeting a certain inventory level for the end of the year? So just maybe some color on that.

No. We think our inventory level is at the right level. Let's not forget that we are looking at a nice increase in sales. So we have to have the inventory. And instead of chasing this inventory, we decided to take some stronger position than the years before. The good -- so I do not think that we'll have another big reserve like we have done in the second quarter. But the good thing is when you look at our business, Linda, we don't have an issue with color or sizes or seasons, we sell the same product quarter after quarter as opposed to other industry. So we think it was the right thing to do to create this reserve for components, certain components that we have bought at a high level for the Moncler, but we do not see any other problem in our inventory.

Michel?

Yes, Nothing more to add.

Okay. And can you just say whether China in the quarter -- in the second quarter was up or down year-over-year in sales?

I don't know China. Michel, do you have info?

Yes. To the best of my knowledge, China sales are actually down because we are -- we continue to run down our inventories. But again, China is relatively moderate in our overall sales number. And I just want to maybe pull on to Jean's comment around the inventory rate. I mean -- normally, we don't have these kinds of write-offs. We haven't necessarily destroyed anything. I think we're just being prudent because we feel that the level of components is above for some specific lines -- is above where we would like them to be. So this is more basically us being prudent. It doesn't necessarily mean that this will be destroyed, and we've decided to completely write them off. We'll continue to monitor this. And if things can move very, very quickly, particularly for some of these smaller brands. You can get a very quick turnaround. It could be successful in the market. And the sales required to get this consumed is relatively small. I mean, remember, we're looking at roughly a 2% write-down of our inventory. So it's relatively small in the overall scheme of things.

There are no further questions at this time. I'll hand the floor back to Michel Atwood for closing remarks.

All right. Well, thank you again for joining our call today. Next month, we'll be attending the 2023 Piper Sandler Growth Frontiers Conference on September 12 and 13 in Nashville, and we'll return to New York to host our annual meetings at our headquarters on September 14. So if you'd like to attend the annual meetings or have any questions, please contact Karin Daly from the Equity Group, our Investor Relations Counsel, her telephone number and e-mail address can be found in our most recent earnings release. Thank you again for your support, and have a great day.

Thank you. This concludes today's call. All participants may disconnect.