Interparfums Inc (IPAR) 2017 Q1 法說會逐字稿

Greetings, and welcome to Inter Parfums Inc. First Quarter 2017 Conference and Webcast. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Russell Greenberg, Executive Vice President and Chief Financial Officer of Inter Parfums. Thank you, Mr. Greenberg. You may begin.

Thank you, operator. Good morning, and welcome to our 2017 first quarter conference call. As usual, I will begin the call with a financial overview, and then Jean Madar, our Chairman and CEO, will discuss current business, recent developments and upcoming plans. After that, we will take your questions.

Before proceeding further, I want to remind listeners that this conference call may contain forward-looking statements which involve known and unknown risks, uncertainties and other factors that may cause actual results to be materially different from projected results.

These factors include but are not limited to the risks and uncertainties discussed under the headings Forward-looking Statements and Risk Factors in our annual report on Form 10-K and the reports we file from time to time with the Securities and Exchange Commission. We do not intend to and undertake no duty to update the information discussed.

In addition, Regulation G, which is codifications for the use of non-GAAP financial measures, prescribes the condition for the use of non-GAAP financial information in public disclosures. We believe that the presentation of the non-GAAP financial information included in this discussion is an important supplemental measure of operating performance for investors.

The information required to be disclosed for the presentation of non-GAAP financial measures is disclosed in our March 31, 2017, quarterly report on Form 10-Q, which has been filed with the Securities and Exchange Commission. This information is available on our website at www.interparfumsinc.com.

When we refer to European-based operations, we are primarily talking about sales of Prestige Fragrance 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.

Moving on to comparable first quarter results. Net sales were $143.1 million, up 28.3% from $111.5 million. At comparable foreign currency exchange rates, net sales increased 30.6%. Sales by European-based operations rose 29.9% to $119.7 million from $92.1 million. Sales by U.S.-based operations increased 20.4% to $23.4 million compared to $19.4 million. Gross margin was 63% of net sales compared to 63.9%, and SG&A expenses as a percentage of net sales was 44.7% compared to last year's 48.3%.

Operating income was $26.2 million, up 49.3% compared to $17.5 million. Operating margin was 18.3% compared to 15.7%, and net income attributable to Inter Parfums Inc. was $13.4 million or $0.43 per diluted share compared to $7.3 million or $0.24 per diluted share.

As previously reported, net income attributable to Inter Parfums Inc. in the 2016 first quarter included a non-recurring settlement of a $1.9 million tax assessment with the French Tax Authorities. Excluding the effect of the settlement, 2016 first quarter net income attributable to Inter Parfums Inc. was $8.7 million or $0.28 per diluted share.

We covered key sales drivers in our releases, so I will concentrate this discussion on profitability factors. For European operations, gross profit margin was 65.5% and 67.3% in the first quarters of 2017 and 2016, respectively.

The overall decrease in gross margin is a result of product mix and increased cost relating to purchase with purchase and gift with purchase promotions. For European operations, such promotions aggregated $9.4 million and $6.8 million for the 3 months ended March 31, 2017, and '16 and represented 7.8% and 7.4% of net sales, respectively.

I should also point out that the average dollar-euro exchange rate for the 3 months ended March 31, 2017, was $1.06 as compared to $1.10 for the 2016 period, which added approximately $1.3 million to gross margin. But that was offset by approximately $1.4 million of inventory sold to the Balmain brand at cost in connection with the license buyout.

For U.S. operations, gross profit margin was 50.1% and 48.2% in the first quarters of 2017 and '16, respectively, with margin expansion primarily due to increased sales of higher-margin Prestige products under license.

SG&A expenses increased 19% and represented 44.7% of net sales for the first quarter of 2017 as compared to 48.3% in the first quarter of last year. For European operations, SG&A rose 18% and for U.S. operations, SG&A rose 20%.

Promotion and advertising included in SG&A aggregated approximately $22.9 million or 16% of net sales for the 2017 first quarter, and that compares to $16.1 million or 14.5% of net sales for the same period one year earlier.

The increase related to the new product launches and rollouts in the current first quarter. Operating income rose 49%, and our operating margin in the current first quarter was 18.3% compared to last year's 15.7%.

We closed the quarter with working capital of $344 million, including approximately $226 million in cash, cash equivalents and short-term investments and $70.2 million of long-term debt, including current maturities, which was incurred in connection with the 2015 Rochas brand acquisition.

Finally, assuming the dollar remains at current levels, we expect 2017 net sales to be in the $550 million and $560 million range and net income attributable to Inter Parfums Inc. to be between $1.20 to $1.24 per diluted share.

Jean, please continue.

Thank you, Russ, and good morning, everyone. As we have already said, this was an exceptional quarter. That holds true for sales by geographic markets. Our 2 largest markets, Western Europe and North America, both achieved 22% year-over-year sales growth, while our third largest, Asia, grew sales by 31%. Even our smaller markets, the Middle East, Central and South America and Eastern Europe had comparable quarter sales growth, specifically 43%, 13% and more than 100%, respectively. One thing we know firsthand is that our commitment to maintaining or perhaps gaining market share through advertising and promotion in 2 difficult markets of 2016, namely China and Russia, has paid off very well this year.

For the remainder of the year, our launch plans include third Legend pillar for Mont Blanc called Legend Night that will debut at the end of this year and roll out further in 2018. We've got a first Coach scent for men debuting also in the fall. And as I pointed out in our last conference call, while we're repositioning our Lagerfeld fragrance enterprise to be more accessible, more democratic and affordable, starting with a new fragrance duo this year.

For Lanvin, we are readying a new interpretation of our top-selling Eclat d'Arpege. I will also give you a peek into 2018 plans, which includes our first new men's scent for Rochas along with extension for Jimmy Choo Illicit, Eclat d'Arpege and Coach for women.

Moving on to the U.S. operations, Abercrombie & Fitch and Hollister fragrances have been and are expected to continue to be the growth catalysts in 2017 and also in 2018. In March, our woman's edition of Abercrombie & Fitch First Instinct debuted exclusively at Worldwide Duty Free (sic) [World Duty Free] in the U.K., and the international rollout is now underway. Hollister Wave 2 launched this spring and is now in broad geographic distribution. We also have a new Dunhill fragrance called Icon Racing launching later this year. And for Oscar de la Renta, the new fragrance called Bella Blanca will hit the market very late this year and early next year. We also have several new products planned for our other niche brands including Agent Provocateur and bebe. With the turnaround in Asia for Anna Sui, especially in China, we have a new fragrance called Fantasia that will debut later this year, and will target China as well as the greater Asian market.

Before taking your questions, I would like to share some of our thoughts about our industry and our place within it. If you Google "fragrance launches of 2016", you will find 1,685 new entries coming up on one website. I know there is a lot of hype around new fragrance launch, but in our experience, new is good, but longevity is much better. Recurring sales of fragrance that are on the market for years achieved significant returns for us, and we have a number of these successes in our portfolio. We will continue to fortify these fragrance gems with brand extensions and flankers as well as new packaging and inspired promotion.

We saw a recent report indicating that the global fragrance industry was valued at approximately $46 billion in 2016, while the industry's 5-year compound annual growth rate contracted 1.3%. During that time frame, our net sales compounded annual growth rate was 11%. I think that says something about our ability to buck trends, gain market share and grow our company. We look to the remainder of the year with confidence in knowing we have a rich and diverse portfolio of brands. We have the financial strength to partner with, acquire or license additional brands. We have an effective distribution network reaching more than 100 countries. And in several of the most important markets, we own or control the distribution organizations. And of course, we have great talent and resource reservoir.

Operator, you can open the lines for questions.

(Operator Instructions) Our first question comes from Joe Altobello of Raymond James.

First question, I guess. Just curious, obviously, a strong start to the year. How did the first quarter compared to what you guys were expecting internally since you didn't update your guidance?

I'm sorry. Can you just repeat that for a second? I didn't hear the end of your...

Just curious how the first quarter compared to your internal expectations coming into the year.

Overall, I think that the first quarter was pretty much in line from a sales standpoint. There were a couple of brands that did a little bit better. But knowing what our launch schedule was, the first quarter was actually probably the easiest comparison if you look back to what we've done in the first quarter of 2016. So from an overall standpoint, it's pretty much in line with what we expected.

Okay. You also mentioned that you're seeing improved trends in Russia and China. How much of that is the market improving? How much of that is increased spending on the part of Inter Parfums?

I think we have a conjunction of both. You remember, that for the last, we'll say, at least 24 months, the Chinese market for fragrance was depressed, but we have continued to invest in promotion and in keeping our shelf space. And when I see the comeback from the markets in the first quarter and continuing into second quarter and we have also now better idea what is going to happen for the year, we are very, how should I say, relieved regarding our business in China. Russia, I will say is similar. We have decided to continue to spend heavily in Russia. We'll do some TV campaigns as early as August or September. So it's a -- I would say that the environment is much better, and our business is quite good.

Okay. Great. Just one last question. And I apologize if I missed this. The timing of the launch of Legend Night, is it late this year or early next year?

We will ship Legend Night in the fourth quarter of this year. We will ship the Coach for men in the third quarter of this year. This is the plan we have.

Our next question comes from Frank Camma, Sidoti & Company.

Question I have on Coach. You gotten off to a good start but it seems to me, and maybe I'm biased because I'm a U.S. consumer but, it seems to me to be one of your best recognized brands, at least U.S.-based. Is there anything that would stop you from maybe pushing advertising spend maybe a little harder to ramp up sales there? Just kind of curious on where that can go over time?

The budget, our advertising budget for Coach is very, very high comparing to sales. You do -- maybe you don't see -- we are spending in the U.S., but don't forget we're also spending in other markets where the brand is maybe less strong. We're spending in Europe, and we are also spending in Asia where we the brand has great recognition. But as a percentage of sales, I can tell you that the amount of advertising and marketing that we are spending on Coach is quite high.

Okay. My second question is for Russ. Russ, you called out a number of factors for the gross margin but the one that stuck out to me is the -- you mentioned in the press release and what you mentioned about the purchase, the gift purchases. I don't remember you calling that out before in the first quarter at least. I mean, that's typically like a 3Q thing. Can you just explain why that was particularly -- because it wasn't really a dramatic change as a percentage of sales, like why that had an impact on the quarter?

You're right. Normally, when we talk about purchase with purchase and gift with purchases, we talk about during the holiday season or certainly during the third quarter because that's where a significant amount of that spending takes place. But we do -- we do have programs that we do throughout the year. And because of some of the launches that we've had, there was more of it in the first quarter this year than we had in prior years, and I just wanted to point that out as one of the reasons for the small decline in margin. The margin decline in the European operations was relatively small, especially when you take into account the $1.4 million of the Balmain brand at cost. So I was really just looking for reasons to explain why the margin declined a little bit in a period where your dollar gained a little bit of strength because one might have thought it should have gone the other way. So I was really kind of drawing at things to explain.

Okay. Just to kind of clarify. We should still expect there should -- you would have your typical seasonal pattern with gift sets in 3Q, I would assume, barring anything unusual.

That's correct. Your gift sets are a little bit different than your purchase with purchase and gift with purchase kind of promotions.

Our next question comes from Jason Gere, KeyBanc Capital Markets.

I guess, I want to go back to the EPS guidance, and I know that it's early in the season but not changing after what seemed to be a nice beat, does imply that the rest of the year that earnings would be down year-over-year. So I guess, if I dissect that a little bit, I guess I'm trying to understand is your A&P expense beyond the 20% that I think you guys talked about. Do you not see SG&A -- or is SG&A going to go higher, are there other like investments in capabilities like e-commerce or things like that, that you need to do? So again, I understand why you didn't raise guidance after this quarter, but I guess I'm trying to understand and peel back the layers of the onion to look at should we expect earnings to be down year-over-year for the rest of the year based on what the guidance implies?

Well, if I'm correct, and I could be wrong, the guidance implies somewhere either plus or minus 1%, depending upon which part of the range that you're in as far as the earnings guidance. But I think it's more difficult than that. What drives the earnings is really your sales volume, all right? And this is where we really need to be a little bit conservative as we move into Q2, 3 and 4. We are comparing ourselves to significant growth that we saw in Q2 and Q3 and Q4 of 2016. To give you an example, European operations in Q2 of '16 grew 15%. The U.S. operations were up 15%. In Q3, Europe was 12%. U.S. was 19%. All right? In Q4, Europe was 13% and the U.S. was 17%. This was all driven by major launches of Coach, of Rochas, of Abercrombie and Hollister. These are creating very, very difficult comparisons. Now we are very hopeful that we will continue to show growth in the sales line. But going into these periods, we really need to be very, very conservative because these are very difficult comparisons to deal with. So far -- I mean don't get me wrong. April looks really good. The sales are a little bit better than we originally expected, but I can't extrapolate that to the rest of the year -- or we can't extrapolate that to the rest of the year. Not yet. We need a little bit more visibility as far as what is actually happening in the marketplace. We do have a lot of launches this year, but many of them are brand extensions and flankers. And it's going to be very difficult to compare with some of the major launches that we had last year.

And I understand that. And I guess, the question is in the first quarter, what percentage of all new innovation came out in the first quarter versus the whole year? So did we see 30% or 40% of all the new launches come out in the first quarter? Or is it going to -- I know you talked a little bit about Coach in the third quarter and Legend I think in the fourth quarter.

Jason what -- the point that you're missing is the first quarter of 2017 when you compare it to first quarter of 2016 for U.S. operations, for example, we did not have any sales of Abercrombie and Hollister in Q1 of 2016. All right? And in Q2 -- in Q1 2017, you have significant sales. All right? Same thing with Coach. Coach was launched in the second quarter -- I'm sorry, in the third quarter of 2016. So for European operations, you had 0 sales of Coach product in Q1 of 2016. That's what made the comparison so much easier for Q1, and it makes it much more difficult for Q2, 3 and 4 or as the year goes on.

No, that's fair. The sales side, I get. So then in terms of from an EPS -- and obviously, I know the sales drives the leverage. Obviously, we saw it in the first quarter. Are you still thinking about 20% or are you thinking about spending more in A&P, maybe a little bit more on the digital side? Just wondering if you could kind of parcel out a little bit some of the margins factors that kind of play into the EPS guidance.

Yes. I think we said it at the end of the first quarter that on a full year basis, we expect A&P to be somewhere around 20%. If you remember last year thought it would be 21%. We came in at 20%. I think that 20% overall is probably a very reasonable number.

Okay. And then the other question, anything just in the e-commerce side. I know obviously in beauty, there's a lot of talk about the U.S. department stores and the good news is that you guys have -- I think your exposure is probably less than many out there. So can you maybe talk about how you guys are looking at alternative channels to maybe offset some of what I think are just headwinds for a lot of manufacturers who sell into the U.S. department store channel.

Russ, do you want to?

Yes, I can. Yes you -- of course, the trend is always there, that there is less traffic in the U.S. department stores, and it's somewhat being replaced by companies like Ulta and Sephora. E-commerce is a very interesting market, and I think we've talked about it briefly in the past. This is something that we are very much looking into and looking to see how e-commerce can be used effectively within our organization. We do have some things that are planned, but I'm not prepared really to go into too much detail on that at the present time. But clearly, I think that e-commerce is definitely something that is clearly the trend of the day, if you will, or the trend of at least this decade. So we'd be remiss if we weren't looking into opportunities that could utilize social media or e-commerce.

(Operator Instructions) Our next question comes from Linda Bolton-Weiser of D.A. Davidson.

So can you just comment on the sort of M&A environment in the fragrance area? Coty has closed its deal with Procter & Gamble Beauty and seems to be starting to accelerate maybe some of its portfolio review. Are you actively looking at potential deals? And how are you thinking about your balance sheet cash? I mean, you've had the high cash balance for several years, and sometimes new licenses don't require cash up front. So how are you thinking about what you may do with that cash balance here now that's been kind of here for quite a few years?

I'm going to try to answer that. So it's probably confirmation that Coty wants to divest some brands. And -- but I will not make any more comments on that. We are always looking -- with the cash we have now in our balance sheet, we are, of course, looking for acquiring names or licensing names. So I will say that the M&A environment is a little bit more open due to this Coty proposed divestiture, but we get offers from brands on -- not on a daily basis but on a weekly or monthly basis. And again, in order to keep the portfolio very, very strong, we are very selective. So we need to get -- we are okay with a smaller brand if we see the potential, we have the possibility to grow without increasing our G&A. So for us, this is -- we spend a lot, lot of time looking at possibility to grow like that. Russ, you want to add something?

Yes. The only thing I would add is that, Linda, you're 100% correct. Many times, on new licenses, if there is not the existing distribution then typically the upfront payments would be almost nothing. But if you are looking to make an acquisition of an existing brand that has existing distribution that may -- maybe it is with Coty or some other licensee at the current time, they're based upon or depending on the size of the business, the number of years remaining on the license, it could require a sizable upfront payment, if you will. We are still committed that we know that the most accretive use of our cash is if we can put it to use in buying -- in opportunities that can add to our portfolio, and we continue to search out and be opportunistic to the extent that we can. As Jean said that there is a lot of deals.

I would like to add that I'm very comfortable having $250 million or close to $250 million cash in the bank, not because we'd be happy to have it and when we decide to make an acquisition for a large one for $500 million or even more. So this will put us in a different category without the near stress. We are looking at medium-sized business, but we could also integrate larger size business. So that's why I think it's very important to keep this cash in our balance sheet.

Okay. And then can I ask about the Jimmy Choo? I think Jimmy Choo is in the process of being sold. Does that represent any kind of risk in the license agreement or does that carry through under the new potential owner?

No. Our license agreement would continue. If I'm not correct, Jean, I think the license agreement goes through at least 2023, '24.

We'll have at least 5 more years with them in front of us. Jimmy Choo is doing very well. We have a great relationship with Jimmy Choo company. We showed them that we are able to do well. We started -- this is a business we started from scratch. We are doing -- can we disclose the number, Ross, by brand?

Yes. Jimmy -- in 2016, we did $90.4 million in Jimmy Choo sales.

So it will be above $100 million business, or it's quite important. The revenues from license from Jimmy Choo are quite important, and the relationship is good. So we expect to -- no issues with the sale of -- the potential sale of Jimmy Choo.

Our next question comes from Hamed Khorsand of BWS Financial.

So first off, is there an update as to when Coach would be released in Japan?

This year for sure.

Is there a reason why you haven't been able -- been releasing it yet?

It was a planned decision from the beginning so we do not see -- you know Coach is very important -- the brand is very important in Japan, but Japan is not a huge market for fragrance. But the U.S. is the main market today. And we are in -- we will be in most of the Japan department stores this year.

Okay. And then any plans to release more multi-scents and just take up on the trend with millennials as far as buying smaller vials that have higher margin?

I don't think I got it. Can you repeat it, please?

Yes. There's this growing trend with millennials as far as buying smaller vials with multi-scents with different scents of the brands so -- and they are being sold with higher margin markups. So is there any plans in your end to release that?

We have collections -- we do have collections like that in most of our programs. It's definitely a trend that we are participating into.

Okay. All right. And then as far as the gross margin outlook goes with the EPS, just given where marketing is now -- are you -- the profits that you recorded this quarter. It sounds like you're just going to reinvest them at a higher rate just because this quarter was stronger. I mean, is that a good way to interpret it?

Russ?

In the first quarter, you're not dealing with a real holiday-type issues with respect to your advertising budget. As you heard before, we expect to spend somewhere around 20% for the full year. Here in the first quarter, we spent 16% of sales and yet -- the sales represented -- what is it 145 -- something like 26% of our annual sales. So clearly, the bulk of our ad spending comes later in the year, predominantly in the third quarter. So it's not a question of reinvesting the profits from the first quarter. We're constantly reinvesting money into the brands in the form of advertising. I don't think anything has changed because of the results here of this particular first quarter.

There are no further questions. I'd like to turn the call back over to Mr. Russell Greenberg for closing comments.

Thank you again, operator. Just one last point. I will be presenting at the B. Riley Investor Conference on May 24 in Santa Monica, and I will also be at the Jefferies Global Consumer Conference in Nantucket on June 20. I hope to see some of you at these events. As usual, if you have any further questions, you can contact my office, and please enjoy the rest of your day. Thank you for participating.

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