Interparfums Inc (IPAR) 2024 Q1 法說會逐字稿

Hello, and welcome to the Inter Parfums first-quarter 2024 conference call and webcast. (Operator Instructions) As a reminder, this conference is being recorded.

It's now my pleasure to turn the conference over to Karin Daly, Vice President at The Equity Group, and Inter Parfums Investor Relations representative. Please go ahead, Karin.

Thank you, Kevin. Joining us on the call today will be Chairman and Chief Executive Officer, Jean Madar; 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 our most recent annual report on Form 10-K.

Forward-looking statements speak only as of the date on which they are made and Interparfums undertakes no obligation to update the information discussed. As a reminder, our consolidated results reflect two business segments, European-based operations and United States-based operations.

Certain Prestige Fragrance products are produced and marketed by their European-based operations through their 72% on French subsidiary Inter Parfums SA. When they refer to the US-based operations, Inter Parfums is talking about their wholly owned subsidiaries.

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

Thank you, Karin, and good morning, everyone, and thank you for joining today's call. I have spent much of the last three months of the year traveling the world to meet with distributors, manufacturers, retailers and boutiques and recurring message I hear is that the momentum in the fragrance market continues that holds true for our business where stronger sell-in and sell-out as well as continued premiumization are gratifying facts.

While sell-out was excellent in the first quarter, even sometimes higher than selling. We are already seeing increased demand and sales acceleration starting in the second quarter as the month of April can attest to. We expect sales and expansion in the second half, therefore, I remain confident in our ability to achieve another record year, just as our guidance implies.

As we reported last year's first quarter was an exception with comparable quarter sales growth of 24%, spurred by a large number of new product launches and rollouts, particularly of our leading brands. Therefore, the 4% sales gain in the current first quarter is still an accomplishment. Our growth primarily stemmed from continued success in our key brands, plus the addition of our newest licenses, Lacoste and Roberto Cavalli, which combined, drove $25 million in sales.

This fragrances were well received by retailers. In fact, we were able to maintain 90% of shelf space for these brands during the transitional developmental period. Early results are very encouraging. And with the addition of new fragrances, our 2024 goal of $90 million for Lacoste and Cavalli, combined is very achievable.

Before I proceed, as I'm sure you all heard, Roberto Cavalli sadly passed away in Florence on April 12. And I would like to say that he revolutionized Italian fashion and defined glamour like no other as a king of excess, leaving a lasting mark in the world of fashion. May his legacy live on inspiring us to embrace uniqueness as before new path in fragrance creation.

Back to business. North America, our largest market had the slight decline in sales attributable to the concentration of launches in early 2023. However, NPD research data reflects sell-out remains strong, growing double digits in comparison to prior year. Western Europe grew sales by 10%. But Eastern Europe is understandably declining in sales due to temporary sourcing constraint, which led to sales shifting from the first quarter to the second quarter.

In Asia Pacific, we are achieving further growth stemming from increased demand, especially in Australia and India. Given the economic and social repercussions of ongoing conflicts in the Middle East and Africa, sales have declined.

Travel retail is finally booming again, increasing 12% during the quarter as consumers travel to explore new cultures and experience different ways of life, while also seeing increasing shelf space and assortment of our portfolio of brands.

I have personally witnessed heightened levels of travel and with my views in line with industry trends while increasing our budget for Travel retail. Sales for our two largest brands, Montblanc and Jimmy Choo decline during the first quarter after their respective 28% and 63% sales growth in the 2023 first quarter. Coach, GUESS and Donna Karan achieved sales increase 5%, 21% and 44% respectively.

Coach fragrances remain in high demand with established lines for both men and women. For GUESS, the combination of legacy scents and the beauty of our newest fragrance guest iconic led to another quarter of significant sales growth. As such, over time, GUESS could become the top three fragrance brands in our portfolio. And for the fashion house duo, Donna Karan and DKNY, we strategically launched the new first scent, Cashmere collection in alignment with the fashion house luxury fashion campaign, which led to the enormous growth in the quarter.

We also achieved further expansion by several of our midsize brands, including Van Cleef andArpels, MCM and Kate Spade with 25%, 15% and 20% sales growth, respectively. As we mentioned in our earnings release yesterday, we have an ambitious launch strategy plan for the balance of 2024, including blockbuster fragrances for DKNY and Lacoste and extensions of the Jimmy Choo I want Choo and Roberto Gabelli signature lines.

Multi scent collection for GUESS fragrance are coming to market this spring, followed in the fall by a new member of the Uomo men's fragrance family. Furthermore, extension for Hollister and Ferragamo's Signoria will debut later in the year.

Beginning this year, our Italian operation started distributing brands within our European-based operations after serving as a distribution hub for certain of our US-based brands, most notably Ferragamo in 2023. We plan to expand our Italian distribution capabilities over time.

We'll also launch phase two of the distribution rollout for Abercrombie & Fitch here during the quarter after a successful Phase one distribution rollout. We expect to see further sales expansion as we complete Phase two this year.

Before turning the call over to Michel, I'm proud to report that Inter Parfums moves further up the industry ranks are causing (inaudible) Annual Beauty top 100 issue published last month in which we placed number 30, up from 33 and 40 in 2023 and 2022, respectively. That is a nice accomplishment considering we are a pure play fragrance company scored against companies that also sell cosmetics, skin care, home fragrance and hair care along with fragrances.

So for me, the fragrance market remains very dynamic and as is in Inter Parfums. We are committed to providing retailers and consumer with new fragrance experiences to serve their senses, curiosity and fragrance wardrobe. We have great brands, including two new ones, a well-balanced pipeline of new product launches and we are operating in a prestige and luxury market that remains robust.

So now I will turn the call over to Michel for a more detailed financial review. Michel?

Thank you, Jean, and good morning, everyone. Yesterday we reported net sales of $324 million during the first quarter of 2024. This represented a 4% growth from the prior year period. This reflects flat sales for European-based operations and 18% sales growth within our US based operations. The 2024 first quarter was in line with our expectations from a sales perspective.

There are a few moving pieces that I'd like to discuss today on today's calls that led to the 24% decline in net income. Firstly, gross margins eroded by 260 basis points on an overall basis due to unfavorable segments, geographic and channel mix within our European-based operations.

We also increased our trade spending to support the business, which was an integral part of our strategy given the limited number of fragrances we introduced earlier this year. It was also modest cost inflation in 2023 for purchases made in Europe due to higher energy costs.

And while this has subsided with the financial accounting method, we must use the older higher cost components in our inventory purchased at a premium. Fortunately, these margin impacts are non-recurring and have lifted.

And as we go forward in 2024, we expect 2024 gross margins to be broadly in line with 2023 as we've explained previously. As we end, we will consider potential moderate price increases in the second half of the year if needed. Within our US-based operations, gross margins increased to 58.7% of net sales, primarily driven by favorable brand and channel mix.

We have increased our sales directly to retailers as opposed to third party distributors due to our growing US direct to retail business. The increase in sales has allowed us to continue to absorb more fixed expenses such as depreciation and point-of-sale expenses as compared to the prior year period. So that covers off our gross margin.

I'm going to touch on SG&A. So SG&A increased to 41.5% of net sales compared to last year's 36.1%. And this is due primarily to our increased investments in advertising and promotion, which aggregated $48.3 million and $35.2 million in the first quarter of 2024 and 2023 respectively, and this represented 14.9% of sales versus 11.3% in the prior year period.

So there are couple of points I wanted to make regarding these numbers. First, as we all know, we're driving strong sell-in and sell-out for our newest brands, Lacoste and Cavalli, and we're able to fill the shelf space Jean mentioned earlier. These two brands have excellent growth potential. And to capitalize on that potential, we invested in advertising and promotional programs to drive those legacy fragrance lines.

We also invested in new programs in preparation for the new products we are currently developing. For the year, we have again budgeted our A&P spending to be 21% of net sales. However, in 2024, as I've previously explained on many occasions, we are spreading our A&P investments somewhat more evenly over the quarters to build brand awareness and to drive competitive agents sustainable growth going forward.

The incremental investments made in the last six months are paying off as we are seeing healthy sell-out in store has explained by Jean with the double digit growth in consumption in the US, for example. Royalty expenses total 8.4% during the current quarter, up from 7.7% one year earlier. This is largely driven by brand mix. The amortization of the cost of the low-cost licenses accounted for $1.6 million during the first quarter of 2024 and will continue over the life of the contract, which is 15 years.

As a result of these investments, our operating margin for 2024 first quarter was 21%. It represented a return to a more normalized level compared to the abnormal and unsustainable 29% in the prior year's quarter. This also more in line with what we're seeing with our competitors.

We closed the quarter with working capital of $530 million, including approximately $100 million in cash and cash equivalents and short-term investments resulting in a working capital ratio of 2.8:1. Our long-term debt, including current maturities was $145 million at the end of the current first quarter compared to $174 million in March 2023, associated with the Paris headquarters and the cost licenses, and we're paying those down over time.

From a cash flow perspective, accounts receivable is up 20% from year end to 2023. The balance is reasonable based on our sales levels and the seasonality of our business. The days sales outstanding was 73 days, only modestly higher from the corresponding period in the prior year, and we continue to see strong collection activity and do not anticipate any issues with collections given our long history and strong partnership with our retailers and distributors.

Inventory levels are up 9% from year end 2023, as expected since we have consistently been building our inventory since 2021 and the additional inventory buildup from producing goods for Lacoste and Cavali.

Before I turn it back to the operator for Q&A, I will touch on our guidance. We are again reaffirming our 2024 guidance as the tailwinds for the year far outweigh the headwinds we have faced. Thus far, we expect to achieve 10% annual sales growth to $1.45 billion.

For further perspective, we believe the first half will be more modest high-single digit growth, largely due to the timing or new product launches in the first quarter, and we are expecting double digit growth in the second half.

This should lead to an 8% increase in earnings per diluted share of $5.15. Of note, included in our guidance, the Lacoste non-cash amortization expense of the acquisition cost is expected to reduce our 2024 EPS by approximately $0.11. Excluding this impact, we are projecting EPS growth of 11% versus the full year 2023.

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

(Operator Instructions) Linda Bolton-Weiser, D.A. Davidson.

Yes, hi.

Hi Linda.

I would just like to get a little more color on the cadence among the quarters, just so we get it all right. I guess for the second quarter because the prior year comparison sales growth is really high too in the second quarter. So the comparison does not get easier.

So in the second quarter, do you anticipate a little bit higher year-over-year growth of sales or lower or even flat sales or maybe you could give a little color? And then also the gross margin I would think wouldn't move up sequentially from the first quarter. Can you give a little color on that? Thank you.

Yes, Michel?

Yes. So Linda, we are expecting double digit growth in the second quarter, which related to also some of the shifts that we discussed between the first quarter and the second quarter. But at this point in time, we are expecting double digit growth in the second quarter and also in the subsequent quarters for the balance of the year.

For the gross margin, as you know, we had a significant charge last year in the second quarter for excess and obsolescence, which goes away. And from there, we are, so there will be a significant help in gross margins in the second quarter and for the balance of the year, again, we are expecting I mean the bulk of the gain will come into the second quarter and for the balance of the year, there will be some marginal at this point in time, marginal increases in gross margin.

But again, for the whole year, we're projecting, if you're modeling this out, you should assume that the one-time gain, the one-time charge we had in the second quarter will go away and then we'll kind of normalize for the balance of the year to get to roughly the same gross margin as in 2023.

Thank you. That's very helpful. As a follow-up, is there any way you could quantify the shift in Eastern Europe related to the component shortages? How much shifted from first quarter to second quarter?

We expecte that was about between 2 points and 3 points.

2 points to 3 points, percentage points as well?

2 points to 3 points of growth.

Of growth, okay, thank you. And then I was curious about, Coty, actually, really specifically said that they felt the global prestige fragrance market had accelerated in growth in the first quarter to mid-teens growth globally. Are you kind of in agreement with that? And do you have any sense for how your POS performed relative to the market in the first quarter?

(inaudible) Michel, you want to answer that?

No, no, go ahead absolute Jean.

I can't agree with Coty. We have double-digit growth in many, many important to regions, US for sure. In the first quarter, Germany, Italy, France for sure or growth of double digit. Maybe it will slow down in the, but we have seen a robust numbers for the first three months. Michel?

Yeah, definitely. I confirm we have seen double digit growth on the US. I think NPD growth for the quarter was up, I think 16%, if I'm not mistaken. And we've also seen a low double digit growth for most of the larger European markets like Germany, the UK, Italy, Spain. I think France was low single digits. But overall, I think the market continues to be very strong in all of the key markets, in key European markets.

Great, thank you. And then just my last question is on pricing. You alluded to positive potential price increases in the second half. I mean, Coty is really talking of being very targeted, very specific, seemingly more reluctant, I guess, to take pricing. So I'm wondering, do you think this would have some negative effect for you to take pricing as competitors or not, or (multiple speakers)

We are also reluctant to increase prices. And we see that certain products or certain lines could do have a price increase, but we'll do it today in a very targeted way. We have not Inter Parfums comparing to the other competitors have not increased a lot in pricing.

So we still have room .And in general, our retail, I'm talking about Prestige fragrances, our retail price up below the competition. So we still have them. We don't want to make it a rule. We don't think that all our brands in our portfolio will have a price increase, but certain products will do definitely.

Okay. Thank you very much. I appreciate it.

Thank you. Thank you, Linda. It was a pleasure to meet you.

(Operator Instructions) Korinne Wolfmeyer, Piper Sandler.

Thanks. Good morning. And I'd like to first touch on the Lacoste and Cavalli sales. I think you said it was about $25 million in the quarter. Is there any way to quantify how much of that was kind of like retail inventory build versus what the proper quarterly run rate is to think about for both these brands going forward? I think previously you've quantified both them as $90 million for the year. Is that still intact? Or are we tracking ahead of that? Thanks.

Michel?

Yes. So Korinne, when you take over a brand, there's already pretty much a pipeline that's out there. The product, the brand is listed. And so essentially, this is really a replenishment of consumption in most cases.

Now obviously, when you take over a brand, you've assessed the landscape and there might be additional distribution opportunities. So we'd say at this point in time, we're on both brands. We're ahead of budget for the time being. And we feel pretty confident about that $90 million for the year and hopefully finished a little higher.

Great. Thanks. And then on the Middle East last quarter, that was a point of caution for you and a reason behind the guidance that you laid out. And I think what you said it was it declined a little bit in the quarter. Was that in track for online in line with your expectations? Was it worse? Was it better? How should we think about that region for you?

What we see in the Middle East was in our budget. So we projected to have a certain softness in this region because of the geopolitical tension. But we have, we are more optimistic for the second half of the year regarding the region. So we think that sales in the important Saudi Arabia and Emirates and also countries around will pick up in the second half.

Great. And then if I could squeeze in one more. Michel, I believe you talked a little bit about spreading out that A&P spend over the four quarters versus the typical seasonality we see. How should we be thinking about that? Is it really going to be more balanced? Are we still going to see some heavier spend in the back half? And then how does this play into your operating margin expectations over the next couple of quarters? Thanks.

Yes, it's a great question, Korinne. I think I've been pretty consistent about the fact that we want to avoid some of the things that we've done in the last couple of years where the sales comes in higher and we don't have enough runway to dispense the A&P and go to ROI. We have built into our financial plans a lot more upfront spending in order to build the momentum that the market is strong, our brands are doing great. We have great innovation.

So really the idea is to capitalize on that and to front spend. To answer your question, we have historically, probably spent of 45% of our A&P or 40% of our A&P in the last quarter. We're going to continue to have a pretty high spending. But we're looking more for about 35% of our spending.

And then it will be spread out a little bit more evenly over quarter two and quarter three. So Q1 will continue to always be a lighter quarter in terms of spending, I think our spending was really, really, really, really low, and we did it to rebalance that.

Great. Thanks so much.

Thank you.

Thank you.

Ashley Helgans, Jefferies.

Hey. Thanks for taking our questions. Just to start on the energy cost inflation. Was this expected to be an impact or something that came about throughout the quarter?

And then just another question on the potential price increases. Can you remind us the last time you took price and correct me if I'm wrong, but if your competitors maybe like Coty were a little bit more aggressive with pricing this last year and you guys kind of stopped taking price kind of midway through last year. Thanks.

Michel, you want to answer the first part?

Yes, sure. Sure. (multiple speakers)

Hey, Ashley, no, I mean the cost of goods, most of the cost of goods inflation basically came in 2023, primarily driven by the higher cost of energies, which drove up the cost of glass bottles, particularly in Europe.

It wasn't really a big surprise for us to see some of those costs coming through it. Typically, you know, as you've seen, we have about nine months of inventory. So some of this stuff kind of will be kind of coming through. I think in the last couple of quarters, it was hidden by the fact that our, we have there's also some, I would say, channel mix and our US business is growing much faster.

As you know, we have a more direct business in the US. So the gross margins are higher there and that part of the business was growing a lot faster. So it was kind of hiding, it was hiding a bit of some of that cost inflation that was kind of making its way.

So not really a surprise. I know it's a big number, but at this point in time, we're still very confident that we're going to hit our gross margin numbers for the year and be more or less versus prior year. We were always expecting some cost inflation. And in terms of, and I'll let Jean basically cover off. I don't know if that covers off your question on COGS, and then I'll hand off to Jean on the pricing piece.

Yes, I think, we have to, yes, thank you for asking this question because (inaudible) has been very, very careful about the price increase in the last 18 months. Whenever we could avoid the price increase we did, and I think within we did the right thing.

But that's true that certain brands want to be positioned at a more premium level. I am thinking of Van Cleef, I'm thinking of Ferragamo. So this is where we think we have, for certain products and certain brands, the possibility to adjust retail price. But it's not at all, not at all a price increase like other people.

Great. Thanks so much.

Thank you.

Hamed Khorsand, BWS Financial.

Hi.

Hello Hamed.

Hello Hamed.

So the first question I had was regarding your top 5 or top 10 brands. How dependent are they on new fragrances to grow sales versus more traditional established fragrances?

Michel?

Overall, it's great question now that. Overall, it's about balance, right? I mean, obviously, this is an industry where you have a pretty high pace of innovation and newness is important and you need to have a good balance of newness to keep the brand fresh This being said, newness can come in different ways. I always use the great example of Chanel.

Number five, you know, it's been out there for 50 years and it's been able to stay fresh, not necessarily with product newness, but with commercial newness. And we've had advertisements like Brad Pitt and stuff like that. So you don't necessarily need a product newness to keep the brands fresh. You need strong heroes. And that's one of the things that we're clearly trying to build.

And if you look at some of our larger our larger brands. We are building strong hero pillar mindset that we can leverage and build over time. And now newness can have some impacts on pipeline.

And that typically where it comes out, but in the form of consumption, I think you can certainly build your brands up with a good product and a strong brand without necessarily having a massive amount of newness, but you need to keep the brand fresh. Jean?

Yes. I totally agree. We need to have a balance. Sometimes it's quite a subtle balance between and heroes, blockbuster or new pillar that we shortened the brand. We do every say, every three years. But every year we have, in order to keep the newness, we have to add the line extensions or what we call in our language (inaudible)

This is the nature of the business. So you have in the portfolio existing in heroes and every year we come up with the extension and (inaudible) of course, different newness for spring and the Christmas season. But I don't see that we are dependent. So we see the nature of the business. This is the way build our model.

Okay. So you're not really seeing consumers just buy the brand, new fragrance try it out out and then move on to the next one, right now. That's not what you're saying?

No. Not really. I think that we are more open to trying new things, but we have pillars in our portfolio that have been in the portfolio for more than 10 years and they still sell and they still grow.

Okay. My last question was regarding your ad spend. Are you doing anything different as far as the advertising, particularly? Is it different strategy other than the spending? Are you using different avenues, more online?

Michel, you want to answer regarding (inaudible)

I mean overall, as you know, Hamed, most of the advertising and promotion has shifted into the digital space. I mean, we typically, every brand has a different prime prospect and a different consumer. And we try to tailor that. But most of our advertising and promotion is in digital. And we've just basically been put in more GRPs, spend more dollars as opposed to spending on new avenues. Jean?

Yes, absolutely. (inaudible)

I appreciate it. Thank you.

Thank you.

Thank you. We've reached the end of our question-and-answer session. I'd like to turn the floor back over to Michel for any further or closing comments.

All right. Well, thank you for joining our call today. Before I end the call, I would like to announce a few upcoming events. I will be both in Chicago and Milwaukee later this month with Piper Sandler, and Jean will be in Grasse with Jefferies at the end of the month. And in June, I'll also be in Nantucket with Jefferies at their annual consumer conference.

If you're interested in attending these events, please reach out to their respective sales representatives. If you have any additional questions, please contact Karin Daly from The Equity Group, our Investor Relations representative. The telephone number and email address can be found on our most recent earnings release. We look forward to the next conference call, and thank you again and have a great day.

Thank you. That does conclude today's teleconference webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.