Interparfums Inc (IPAR) 2017 Q2 法說會逐字稿

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

I would now like to turn the conference over to your host, Russell Greenberg, Executive Vice President and Chief Executive Officer. Please go ahead, sir.

Thank you, Stacy, for the promotion, but I'm Chief Financial Officer. But good morning, everybody, and welcome to our 2017 second quarter conference call. As usual, I will begin the call with a financial overview and then Jean Madar, our Chairman and Chief Executive Officer, will discuss our 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, codifications for the use of non-GAAP financial measures, prescribes the conditions 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 important supplemental measures of operating performance to investors. The information required to be disclosed for the presentation of non-GAAP financial measures is disclosed in our June 30, 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 our European-based operations, we are primarily talking about sales of Prestige Fragrance products conducted through our 73%-owned French subsidiary, Inter Parfums SA. When we discussed 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 second quarter results. Net sales were $129.1 million, up 10.2% from $117.2 million. At comparable foreign currency exchange rates, net sales increased 11.3%. Sales by European-based operations rose 20.5% to $106.7 million from $88.6 million. Sales by U.S.-based operations declined 21.5% to $22.4 million compared to $28.6 million. Gross margin was 65% compared to 63.5%. SG&A expenses as a percentage of net sales was 53.8% compared to 53.7%. Operating income increased 26.3% to $14.5 million from $11.5 million and operating margin rose 11.2% compared to 9.8%.

Finally, net income attributable to Inter Parfums, Inc. increased 15.7% to $6.7 million or $0.22 per diluted share, and that compared to $5.8 million or $0.19 per diluted share in the prior year. Thus, for the year-to-date, net sales were up 19% to $272 million from $228.7 million, resulting in net income attributable to Inter Parfums of $20.1 million or $0.64 per diluted share, up 52% compared to $13.2 million or $0.42 per diluted share one year earlier.

You may recall that our first quarter of 2016 in the results, we included the effect of a settlement of the tax assessment with the French Tax Authorities in the amount of $1.9 million. Excluding the effect of that settlement, net income attributable to Inter Parfums, Inc. for the first half of 2016 would have been $14.6 million or $0.47 per diluted share.

Since our recent press releases discussed sales drivers, I will focus on factors that impact profitability. The increase and high portion of European-based sales had much to do with the 150-basis-point increase in consolidated second quarter gross margin. For European operations, gross profit margin was 68% and 67% in the second quarters of 2017 and 2016, respectively, with that increase primarily related to the stronger dollar to euro exchange rate. The average dollar euro exchange rate for the 3 months ended June 30, 2017, was $1.10 compared to $1.12 for the corresponding period of the prior year.

For U.S. operations, gross profit margin was 48% and 53% in the second quarter of 2017 and 2016, respectively, with margin contraction related to the shift in product mix as second quarter sales decline was due to a very difficult comparison resulting from the initial launches of Abercrombie & Fitch and Hollister products in last year's second quarter.

SG&A expense increased 10% as compared to last year second quarter and represented 54% of net sales for both the current and prior year second quarter. For European operations, which achieved comparable quarterly sales growth of 20.5%, SG&A expenses only increased 18% and represented 56% of net sales in the current second quarter as compared to 57% in the second quarter of 2016. The 21.5% decline in second quarter sales by U.S. operations was matched by a similar decline in SG&A expenses and represented 44% of net sales by U.S. operations for both the current and prior year second quarter.

Promotion and advertising included in SG&A expense aggregated $30.5 million or 24% of net sales for the 2017 second quarter as compared to $24.9 million or 21% of net sales for the same period one year earlier. That increase related to new product launches and rollouts in 2017.

Operating income rose 26.3% and our operating margin in the current second quarter was 11.2% versus 9.8% one year earlier. As we noted in our earnings release yesterday, there was an $817,000 loss on foreign currency in the second quarter as compared to a $660,000 gain in last year's second quarter. Also of note, our effective tax rate was 33% in the current second quarter as compared to 36% in last year's second quarter.

We closed the quarter with working capital of $358 million, including approximately $241 million in cash, cash equivalents and short-term investments. A working capital ratio of 3.4:1 add only $69.1 million of long-term debt, including current maturities that were incurred in connection with the 2015 Rochas brand acquisition.

Finally, assuming the dollar remains at current levels and with the benefit of a strong first half and greater visibility into the second half, we expect 2017 net sales to be in the range of $560 million to $570 million, resulting in net income attributable to Inter Parfums to be in the range of $1.25 to $1.27 per diluted share. Of note, certain brands are outperforming what we initially budgeted back in November when we established our initial 2017 guidance. Specifically, Jimmy Choo, Lanvin, Rochas as well as Coach are performing better than originally anticipated.

Jean, please continue.

Yes. Thank you, Russ, and good morning, everyone. One of the most encouraging signs in our business is how sales in all of our markets are up, thus far, this year. In Western Europe, we're up. North America and Asia, the 3 largest markets are up. Western Europe we are up 4%. North America, we're up 25%. And Asia, we're up almost 27% compared to the first half of 2016. Our next 3 markets rank by size, the Middle East, Central and South America and Eastern Europe achieved sales growth of 30%, 15% and almost 100% for Eastern Europe, respectively.

So for the remainder of the year, our launch plans include a third Legend pillar from MontBlanc called Legend Night, which is debuting at the end of this year with a rollout continuing in 2018. Once again, we have the elegant model, Simon Clark, as our ad model and spokesperson, this time wearing a formalwear jacket and tie for this new Legend Night. We have also Coach for Men, unveiling in the fall. For starters, it looks like we will have USD 2,000 and between EUR 8,000 and EUR 10,000, followed by another $3,000 to $4,000 in January. I think we found a perfect face for our ad campaign with James Franco, who embodies the creativity, confidence and style of a Coach guy.

Moving on to the other launches for this year. We will have Dunhill Icon Racing, making this debut in certain markets in September and October with a huge rollout during year-end and first quarter of next year covering just really all of Europe, the Middle East, Asia, Africa and much of South and Central America. This scent doesn't [hire their land] on U.S. stores until the Spring 2018.

We also have Fantasia by Anna Sui debuting later this year, targeting the greater Asian market. However, the launch in China will be the following year due to long registration period that is required to sell the product in China today. We expect these launches to have a very favorable impact on sales by U.S. operation for the second half of the year.

To update you on some of our current plans for 2018, our new interpretation of our superheat Eclat d'Arpege Bulova is in the pipeline, as our also extensions of Jimmy Choo Woman signature scent and our Signature Men's and Women's scent for Coach. On our last call, I indicated with our first new men's scent for Rochas was planned for next year, 2018, but we have decided to move it to 2019. And we will be adding also new members to the Van Cleef & Arpels Collection Extraordinaire family as well as the multi-scent Boucheron collection.

Moving on to 2018 plans for our U.S. operations. We have a brand extension for the Hollister Wave collection coming to market early in the year and the completely new Hollister fragrance family launching in stores in the spring of 2018, both are fragrance jewels, meaning for men and for women.

For Oscar de la Renta, we have a woman scent called Bella Blanca that will be hitting the market in the Spring of 2018. We also have a new fragrance family debuting for Dunhill called [Century]. A global launch of Fantasia were made for Anna Sui now scheduled to debut next summer. And for Abercrombie & Fitch, we have several brand extension plans, including 2 for men in the first quarter and 1 for women in the summer. The first instinct portfolio collection of Abercrombie will ultimately -- intimately be completed in 2019 with 6 fragrances, 3 each for men and for woman.

What more can we say? Business is good and growing in all markets, and the month of July was also very strong month for us. We had a rich and diversed portfolio of brands. We have a financial strength to be a contender when suitable acquisition and [other] licensing opportunities arise. We have an extraordinary global distribution network made up of national and regional market experts, which gets product base in the right venues, expertly direct our advertising and promotional programs in their territories and optimize sales into 100 countries where our products are sold. While our pipeline of new products is plentiful, we also enjoy the recurring benefits of several reliable top sellers.

I hope you saw the news we issued on July 31, announcing that Veronique Gabai-Pinsky, President of Vera Wang Group, is standing for election to our Board of Directors at our Annual Meeting on September 12, filling the vacancy that Jean Levy leaves upon his retirement from our board after 20 years of distinguished services. As we summarized in our news release, Veronique has an exceptional resume and, will no doubt, be a terrific addition to our board.

Before turning it over to the operator for our traditional Q&A session, I would like you to know that we are reaching a special milestone in our corporate story. On February 14 of next year, we will mark our 50th year on NASDAQ as a public company by ringing the closing bell.

So operator, you can open the floor for questions.

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

So in terms of the sales guidance increase for the year of $10 million, it looks to me like most of that is FX-related. Is that the case? Or is there some that non-FX related?

Russ, you want to answer the question?

I think it's -- I think there's a little bit of a combination. FX really did not impact at all in the first half of 2000. I think it represented less than 1%. The dollar has shown some recent weakness, so the euro showed a little bit of strength. So it plays a small role, but I think most of it is because of business. As I mentioned, there were 4 brands: Jimmy Choo, Rochas, Coach are all performing a little bit better than expected.

Okay. And then you ran through a lot of things that you have coming in 2018. It sounds like a busy year of launches. But if you had to hone in on just a couple of the most significant things, would they be the Jimmy Choo and the Coach extensions? And are those both in the women's area? Is that what you plan for 2018?

Don't forget also Bulova. We're going to come up with a new Nova women's to complement Eclat d'Arpege. And yes, so -- and of course, the Jimmy Choo. And in the U.S. also, we're going to have a busy year with the new Oscar, a new Dunhill. So it's quite balanced. I think we have new products from important brands, so we look forward for a busy year 2018.

[Okay. And just, Russ, on a question on the margins. You mentioned that FX did play some role in the gross margin expansion in the quarter. So I think with the euro comparison being more up year-over-year in the third and fourth, so should we expect a little less gross margin expansion in the third and fourth quarters year-over-year?](inaudible)

Yes. I think that would be correct. If the -- again, I can't anticipate exactly where the euro dollar exchange rate is going to go. I'm not expecting the euro to be extremely strong. Our gut feeling is that it is probably going to be kind of close to where it is now, and that's the assumptions that we made. Clearly, at $1.15 or $1.16 or $1.17, it's a stronger euro that will play a little bit of a role in our gross margins. I don't really expect it to be anything too significant though.

[Okay. And just finally, the royalty expense ratio was a little bit lower than we had expected. Is there some particular reason for that in the quarter?](inaudible)

As I mentioned in the Q, we said a little bit on the renewal of the S.T.Dupont license and the sell of the Balmain license, which had relatively low sales and a higher royalty rate as a result. But I also believe that with the continued growth of Rochas and the continued growth that we've seen recently with Lanvin, these are also play into the fact because those are both brands that we do not pay royalties on. So I think we can see we are usually around 7%, 7.1%, 7.2%. I think that number will go down a little bit as time goes on.

Our next question comes from Joe Altobello with Raymond James.

First question, I want to go back to U.S.-based ops. It looks like -- I think back in March, you guys mentioned that you thought that business would be up high singles, low doubles for the year, and obviously it's down a little bit year-to-date. You do have a new Dunhill fragrance coming out, Anna Sui fragrance coming out. Will those be impactful enough to really accelerate sales in the back half?

I'm not really -- I know that in the first 6 months, we sure sense down comparing to last year. But last year, the competition was difficult. But I will say that already by the end of July or middle of August, sales are going to be almost equivalent and we're going to have a gain after that. We have -- the business in the U.S. is strong that we have to delay some of the launches, that's why our sales are down for the quarter and for the 6 months. Russ?

Yes. The only thing I would add is for the 6 months where it's only down around 5%, I think that we could probably stand that. It will probably be a -- I don't remember saying low double digits, but I think that, towards the end, yes, certainly in the single-digit range, I think we'll have, for the U.S. operations, an increase.

Okay. So second half, I mean, if you look at your guidance, it sounds like you guys are assuming U.S.-based ops will outpace growth in European operations, which probably puts further downward pressure on gross margin, I would think, including FX.

Pressure, I don't know about FX. I'm sorry...

Jean, I was wondering...

So yes, go ahead, Russ, go ahead. I will let you answer.

Yes. I don't really see how FX is going to have that big of a role going into the second, the third and fourth quarter. But you're right, the U.S. operations growth rate should outpace slightly the European growth rate in the last half of the year. But I don't really see that having any major impact on margins. It's more the FX that's going to have the effect on the gross margin.

Okay, okay. And just one last one. You guys obviously still sitting on a lot of cash here, any update on your plans to deploy that, what the market for trademarks looks like, for example?

We are active. We are [buying]. We are actively looking. We cannot make any announcement, of course, but definitely acquiring new license of trademarks obviously in our plans. Russ, you want to add something?

No, I think the answer is that there has been no change. We are still actively pursuing, putting that cash to use.

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

Really being able -- one of the few CPG companies that actually is driving positive volume growth in the quarter. So you should -- that's obviously an accomplishment. I guess 2 questions, one following up on Joe's question. So as we think about Europe in the second half of the year, the organic sales. I know you have to sell enough Coach in the expansion there and some launches. But comparing that to some of the, I guess, some of the strong sell-through we saw last year, it sounds like we should expect kind of low -- we should see kind of growth organically in Europe, but U.S. would track just a little bit faster. I just want to make sure that I understood that correctly.

That's exactly correct. For the European operations, we have some very difficult comparisons as we move into a period, where you're comparing 2017 to 2016, which included the launch of Coach. That was a very, very strong launch for us in the second half of last year, and it will make for a little bit of difficult comparison. And that's the reason why the U.S.-based business will outpace or is at least anticipated to outpace the European business for the second half.

Okay. And then, I guess, when you look at the quarter and the performance...

But I would like -- if I may, I would like to add also that I agree with Russ. But the fact that we are able to launch the new Montblanc Legend Night quite early in the third quarter, we -- I think we should be able -- if it works, we should be able to get some real [doves before Christmas]. So definitely, Europe will have a difficult comparison for third quarter, but we could have some (inaudible) in the fourth quarter.

Okay. And I guess when you look at the performance that you delivered this quarter versus maybe where you were a little bit before, were there any regions or channels that you were surprised by how strong the trends are? Again, I know beauty kind of is, I would say, an anomaly in a very tough retail environment. But if -- maybe e-commerce or you're talking about like which regions, which markets. We're a bit stronger than you thought, just in terms of how that can expand maybe as, again, to the back half of the year.

I'll start, Jean. I mean, certainly, the -- our sales activity in Eastern Europe have really picked up compared to the last several years where there was quite a bit of difficulty within that marketplace. I know it's dealing from a smaller base. So an almost 94% or almost 100% increase isn't significant to some of our bigger markets, but it really plays a big role with some of the brands that we have. Also, the Asian market, especially China, which is picking up a little bit, those -- I don't want to say they come as a surprise, but it's nice to see a little bit of a turnaround.

Yes, definitely a turnaround in China. And Russ, let's not forget that the U.S., the North American business with Canada is up, what, 20%, 25%.

Yes, 25%. Exactly, exactly. Yes, you're right.

Also, it's quite a surprise. We had a very good sell-through of our programs in the U.S., and first quarter looks also strong. So it's not that we have -- it's not in our (inaudible), but it's a little bit better than our plan, that's why I think we raised our guidance.

And then the last question, then I'll hop off. A&P was very nice to see. Obviously, it would have beaten the quarter and a high-quality beat that is. You saw the A&P spending really get good returns. So I guess, I know in the past you talked about 20% as a percentage of sales, now you're at 21%. I guess the question is, where do you see that number going, the 21%? Obviously, you could invest more because the first quarter you had better earnings growth coming through, so you can reinvest. At what point do you think that it kind of levels off? It's 21% now kind of the right way to think about it? Or do you -- would you continue to just keep investing if you think you're getting that incremental return? I'm just trying to think about how you can manage margin versus kind of the sales growth algorithm going forward?

It's a very good question. Russ, you want to start? I will answer after.

Yes, certainly. I think, number one, is I want to reiterate that the 21% that I mentioned for the current year has not changed. I still believe we're going to end the year with around 21% of our sales spent on promotion, which implies almost 23% being spent in the second half because we spent around 19.5%-or-so for the first 6 months of the year. So we're looking at around 23%. And the only other thing I'm going to mention, the only thing that really changes that number is your new launched schedule, all right? Because whenever you do have a new launch of a new pillar fragrance, new family fragrance that needs to be supported with advertising at a higher level than your ongoing, existing or a flanker-type products that's being launched. Jean?

Yes. For me, it is clear to keep increasing the spending for A&P because this is the future of our sales. So at 21%, I'm comfortable. If business continues to grow, we'll save maybe a point or 2 on G&A and I would like to spend a little more in advertising. This is the best insurance for our future sales.

(Operator Instructions) Our next question comes from Frank Camma with Sidoti & Company.

This is Frank Faiella on for Frank Camma. Just a kind of follow-up on the A&P. It looks like it's kind of near and all-time high as a percent of revenue. Is there any -- you mentioned launches, is there any other one-time things this year? And then also could you maybe break out the difference, the traditional versus digital? And if that's different, than what it's been in the past?

Russ, you want to...

I -- the first part of the question, which really talked about increases over the course of several years, I think that falls exactly what Jean was just saying, that the best investment we could make for the future of our business is to continuously increase our ad spending. And even if we can save a few points here and there on some other G&A-type items, to reinvest it in A&P type of spending is the best thing we can do for the company. The only thing I'm going to add to that before I answer the second part is keep in mind that this is dollars that we spend in advertising and marketing and promoting product that is included on our -- in our G&A. When we're working with our distributors around the world, our distributors also spend a certain percentage of their sales on marketing in their local territories. So the amount of spending is actually far in excess of the 21% that we see here. As far as the breakdown between digital and traditional advertising, I think every company in the world is moving more and more and more into the digital arena. Fragrance for a variety of different reasons still spends a significant amount in the traditional type of advertising. The magazines, the sense trips that gives -- it gives the readers or it gives the people the opportunity to actually smell the product. But certainly, I can't go into details of exactly how much, but I think there is clearly a shift to reach the customers of today by moving some of your advertising dollars into the digital arena.

That's helpful. Let me just say one...

Our spending is not on year. Advertising, it's also a promotion. It's also a presence in the point-of-sale, how we look in the activities that we may have in order to animate the business. So yes, we look at -- and we're spending more into digital media. But it's very important to keep a good presence in the stores, and we're spending a fair amount of money there.

Then just quickly on operating leverage with the nice revenue increase. Can you just talk about -- was that in line with what you have thought and if you're still spending some on fixed costs? Or any color you can give there.

I really did not hear you.

Can you repeat the question?

Sure. The operating leverage, we saw a nice increase in revenue obviously. Just wondering if that was -- the leverage was in line with what you guys were anticipating or if you're still kind of investing in the fixed cost structure there.

The operating leverage, we really look at our operating leverage for the full year because the promotion and advertising budgets are so skewed from one quarter to another with a lot of the spending in the latter part of the year, much of it even in the fourth quarter. So it's very difficult to look at the operating income on a quarterly basis. So we tend to look at it on a yearly basis. And last year, we ended the year at somewhere in the high 12%, 12%, 12.5%, maybe even almost 13%. As we move into 2017, I think we're certainly going to be over 13%. How much over? I don't know. But we're heading towards our goal of reaching that 14% or 14.5%, which we believe is where this business should be. So yes, I think we're going to, hopefully, try to continue to gain operating leverage as we continue to increase our sales.

Our next question comes Steph Wissink with Jefferies.

Russ, just a couple of follow-ups on channel performance in particular. I'm wondering if you can talk a little bit about the different channels in the North American market as well as around the world, department stores maybe some of the emerging specialty players and then the drug store channel in Europe.

Okay. Jean?

Yes, I can try. In Europe, most -- all of our business in Europe is in department stores and independent (inaudible) and some Internet website. We do not sell drugstores -- drug chains in Europe. In the U.S., our business is, I will say, 70% into traditional department stores. We do business with Ulta and we do business with Sephora. But Sephora in the U.S. sells more cosmetics than fragrances. So our presence is much stronger in department. So the growth that you've seen in the U.S. of 25% growth is really coming from our programs in department stores. So we are really gaining market share for sure. Russ, you want to add something?

No. I think there's always been because of -- we always hear the traffic moving away from department stores and into other stores like Ulta. But for the -- for our business, the department stores still remained one of the strongest elements. Steph, are you there?

Just one follow-up...

Yes, go ahead.

Yes. Just one follow-up on travel retail. I'm wondering if you can just give us some sense of how the category is performing at travel retail. And then any specific markets or large travel hubs that you would want to call out just given the success you've had with some of your both owned as well as licensed brands?

U.S. travel retail is doing quite well. Europe retail also. We have some challenges in Asia, especially in Korea. It's not a secret. It happens to many companies, the lack of tourism and lack of traffic in Korea. But otherwise, I would say that we are making more and more special programs for the industry operators and it's quite successful.

I think -- yes, thank you.

You wanted to add something, Russ?

Well, I was just going to say that over the last several years, the amount of our business in travel retail has clearly been increasing. Today, it's probably about, what, 15% to 17% of our business, something along those lines. So it clearly has been a strong market for us.

Our next question comes from Hamed Khorsand with BWS Financial.

I just wanted to follow-up here the discussion with marketing. In the first half, you've spent less than your target range and you've gotten more out of each dollar spent and then you're talking about second half increasing that to 23%. Are you getting better traction, better return on those dollar spends? And does it make sense to do that 23% spending in the second half? I'm just trying to get an understanding here because first half was very strong on the sales front.

Yes. It's okay to insist on it because this is a key part of our model. We spend in advance in order to make sure that we have reorders. It's very, very simple. So we're going to launch a very important product from MontBlanc in the second half. We're going to launch Coach for Men. So definitely, we're going to [overinvest], and that's why you go to the 23% in the second half. The results, we will see them in the first and second quarter of 2018 also. So it's -- this formula works for us, and I think it's absolutely fine to go to this level.

Yes, I think the spending also follows where the actual buying of the product happens at location. We sell into our distributors, and the product then eventually ends up in the retail. The customer is buying at the retailer at a later period of time. And here you have holiday seasons coming up in the third and fourth quarter. The advertising is definitely needed to drive to sell-through.

Okay. Are you seeing anything in the early goings right now? Or is it too early for the holiday [spend] inventory build?

I think as Jean said...

Yes. I mean, the sell-in is quite good. We have the orders. We have received for July, August, September are quite strong. So the stores will have a good amount of inventory. We have to make sure that it's helpful. That's why, again, it is key to do this spending. But the business for the first -- for the third quarter is very promising.

And my last question is, is there any update on your online initiative to sell more online?

No, we do not have a particular update. We're working on a lot of projects, but we are not ready yet to make announcements.

Exactly.

And we have a follow-up question with Linda Bolton-Weiser with D.A. Davidson.

No, well, I think all my questions are answered. But I was just wondering on the (inaudible)

Today, it's mostly departmentstores.com, the internal sites from retailers. We do business limited, but we do some business with Amazon. But the goal will be to increase our presence, our sales with Internet either with special -- particular brands or special programs. We have a team in our company working on this project, but, again, not ready to talk about it.

There are no further questions. I would like to turn the call back over to Russell for closing comments.

Well, thank you again, operator. Just a few, a quick point. I will present -- I will be presenting at the Keybanc Investor Conference in New York City in early December. I will know more about the specific dates by our next conference call in November. And as usual, if you have any further questions, please contact me at my office and enjoy the rest of your day as well as the rest of the summer. Thank you.

Thank you. Thank you, everybody.

This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.