Q2 2020 Inter Parfums Inc Earnings Call
Hello, and welcome to that you support for second quarter 2020 results Conference call. At this time all participants are you listen only mode. If anyone should require operator assistance. Please press star Zero Wonder telephone keypad question answer session will follow the formal presentation. As reminder, this conference is being recorded.
So my pleasure trick attributable over to Russell Greenberg. Please go ahead Sir.
Thank you operator.
Good morning, and welcome to our 2022nd quarter Conference call.
Once again it is not [noise] it is not business as usual.
But I hesitate to adopt the overused phrase the new normal because our plans call for the eventual return to our long term growth and profitability goals recognizing that there will be de tours and speed bumps along the way.
There's no need for me to read out the second quarter comparisons that were in the release, we issued yesterday afternoon.
I will devote my discussion to explanations of those results since the balance sheet items, and then Sean will follow.
As usual however, I must read the following 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 for the year ended at December 31st 2019.
The quarterly report on form 10-Q, four the second quarter ended June Thirtyth 2020.
And other reports we file from time to time with the Securities and Exchange Commission.
We do not intend to an undertakes no duty to update the information discussed.
One more recurring message when we refer to our European based operations. We are primarily talking about sales of prestige fragrance products conducted through our 73% own French subsidiary.
<unk>.
When we discuss our U.S. based operations, we are primarily referring to sales of prestige fragrance products.
Conducted through our wholly owned domestic subsidiaries.
Our consolidated second quarter gross margin declined to 54% compared to 64% in last year's second quarter.
The gross margin for European operations was 57% compared to 68% in last year's second quarter.
Once again, the strong U.S. dollar had a small but positive effect on our gross profit margin, which was offset by product mix and by a 2 million dollar charge relating to the assumption of a return liabilities for products sold by a former licensee.
Have a brand that we took over in 2019.
For U.S. operations gross profit margin was 43% versus 52% in last year's second quarter.
As a consequence of the 75% decline in U.S. operations net sales certain expenses, such as depreciation of tools and moulds together with distribution of point of sale materials, such as video see swore vial on costs.
Amplified the decline in the U.S. gross margin.
As I turn.
The discussion to expenses once again, please keep in mind that the start of 2020, our operational budgets were based on our original projected sales of 742 million.
And as we have mentioned before our sales in January and February with the exception of China were pretty good.
In March as covert 19 took hold throughout North America, and Europe, and as sales ground to a halt we curtailed our ad spending.
However, we had advertising and promotion campaigns.
Already underway and there was not much we could do to limit those expenses.
By the second quarter, we weren't able to reduce promotion and advertising included it in SGN, a expenses to 11.8% of net sales as compared to 21.9% in last year's second quarter.
As you probably know by now in a typical year, we budget around 21% of net sales for advertising and promotion with the fourth quarter accounting for the largest percentage.
[noise] there is nothing typical about 2020.
Since most of our planned 2020 launches have been rescheduled for 2021.
We significantly reduced our budgets for advertising and promotion expenses in dollars as well as I use as a percentage of net sales for the second half of the year as compared to the corresponding period of the prior year.
[noise] our license doors have been extremely co-operative that accommodating during this period.
They have waived or dramatically reduced our 2020 minimum royalty guarantees.
Royalty expense represented 6.8% and 7.5% of net sales for the three and six months ended June Thirtyth 2020.
As compared to 7.3% of net sales for both corresponding periods of the prior year.
[noise], although SGN a expenses are down 62% compared to last year's second quarter.
As a percentage of sales SGN, a expenses were 65% compared to 51% in last year's second quarter.
For European operations, where second quarter sales declined 69% That's street I expenses declined 66%.
And ended up representing 59% of net sales as compared to 54% in the same period one year earlier.
At the end to the day European operations remains in the black for the second quarter and for the year to date periods.
For U.S. operations SGN, a expenses were down 44%.
Represented 91% of net sales and the second quarter as compared to 40% in the second quarter of 2019.
Our U.S. operations are significantly smaller than those of our European operations and carry a higher percentage of fixed costs that could not be leveraged as efficiently as those of our European operations with the precipitous decline in net sales.
[noise] you know one last conference call in May we talked about erosion of the positive leverage that we've enjoyed over the past several years as the loss of fixed cost absorption produced a decline of our operating margin.
As you can see our previously for our previous forecast of of the greater decline in the second quarter sales and margin. Unfortunately came true.
However, we also forecasted that the second quarter Woodmark, a low point.
And based on current sales and orders.
Also appears to be true.
That said, we are hesitant to forecast what will happen further down the road.
With the Specter of covert 19 still upon us along with its economic consequences.
Our effective tax rate for European operations was 26% for the six months ended June thirtyth as compared to 30% for the corresponding period of the prior year.
With the reduction due to favorable tax rates.
Other jurisdictions, where our European operations conduct business, such as Singapore, Switzerland, as well as the United States.
Our effective tax rate for U.S. operations resulted in a benefit of 33.8% for the six months ended June Thirtyth 2020.
As compared to when expense of 17.3%.
For the corresponding 2019 period.
Due to the loss incurred in 2024 federal tax purposes, we will be able to carry back that loss to 2015, when the federal income tax rate was 35%.
[noise], it's the corridor with working capital of 386 million, including approximately 195 million in cash cash equivalents and short term investments are working capital ratio of 4.8 to one.
48 million in untapped credit facilities, and only 18.9 million of long term debt, which includes borrowings made in connection with our equity stake in the parent company of origins part farms, just a last month.
While accounts receivable are down significantly from year end levels.
These are difficult times for most retailers and some have gone bankrupt.
We have faced then they continued to face increasing delays in payment of accounts receivable from our customer.
This is especially true of duty free retail customers.
As John mentioned on our last conference call.
However, a significant portion of <unk> around our receivables are covered by insurance. So our exposure is not significant.
We also closed the quarter with considerable inventory with the increased from year end levels, mostly in finished goods, which optimistically translates into we are ready to sell.
You will recall that on our last conference call. We had placed orders with suppliers late last year and early this year to support the 2020 new product launches.
[noise], but with the exception of coach Dreams and long real Shas.
Which both the Buda earlier in the year, our major launches have been pushed into 2021.
With business picking up inventory levels should improve as the year unfolds.
Now I will turn the call over to John for a closer look at how you're doing and what we're doing.
Thank you Ross [laughter] and a good morning, everyone Huh.
Why there is nothing redeeming about that where we sound financial before maam.
Yeah, maybe interested to know that the second quarter, two dozen 20 Watt I will [laughter] cooked Tony Love.
Since our IPO.
In 1988.
Well, maybe through the 911, the recession of 2008 than the last of <unk> largest license into doesn't so you know, which was representing 50%, though it says and remain profitable. So these are will fill squawked, although I think it's going to be left one.
Because we.
We do not expect to lose money in the South Dakota and Oh.
[laughter], Pennsylvania, I Wellness Center in North America, Western Europe Asia, Amit the at least on this stuff and then you're up well down from the unlike us up to nine to five but we're still in Europe.
Uh huh.
Asia, [laughter] sod, 53% caught me, the 57% and focused on Europe.
In the house, our two largest brands, which are montblanc and Jimmy Choo.
Dan Cisne declined 50% phone launch faulty prepas Unfortunately too.
Uh huh.
And Oh, well next to logistic Rod we saw quotes and good had more modest do you have to they said it declined 21% City council coach and 21% Hogan.
Following 2020 fills cooked up since gain of 5% fall quotes and 29% <unk>.
Moving to sanction of international travel and corresponding love of business. We did you see still what a major factor in the pretty.
Precipitous drop in that sense, especially in Asia.
And then in connection with the two big sick and got a gift, giving holidays mother's day father's day were not surprisingly under winning.
Hopefully the hub the upcoming holiday season would be a difference don't eat and drink youre. The the QNX session I wouldn't be able to give you some picture of what's going up.
What we have seen thus far in just the so called <unk>, which is a July ends assisted attendees of August either.
[laughter] ER in Ah, we thought well business in Europe are showing positive trends in Asia, Vicki picking up in a in the U.S.
That said they are meaning for a road blocks in front of.
Either way on the ones still have reopened yeah. The legal costs, we've Oh, I imagine signed some dish and stuff treating masterful stuff and got them now.
Okay.
And I will add anything of close to the concentration of custom else well of course consumer about how demand for <unk> product is being impacted by deteriorating economic and pretty cool conditions.
And the effect of such as the high unemployment reduce a disposable income.
With with will play a role.
These conditions all schools the beyond our control, but I will business model has gotten us who difficult times in the bye.
To summarize where I'm not capital intensive I was over two dozen 20, capex budget and $4 million.
On the full armed with who've done employees worldwide and they have been able to upper right remote and efficient.
You know typically a approximate.
Two.
<unk> expenses are valuable and that well yeah. The on fixed expense would come in under 25 million.
Dollars got caught up.
I've always maintained an exceptionally strong balance sheet. So we don't need to raise money, we don't need to hire more people to legal would be that well see bull able to tens Colfax underground.
The business characteristic haven't midnight us against the effect of could be 19, but he doesn't chicken our conviction between gets to be although side of equation.
Moving ahead, we have continued to bomb due mostly to the we supply is to do license sales retailers and because of a coming into me. The virus. So there's greater cooperation between us we need to understand and respond to that pushes our thought though they and they need to do the same we though.
Push up once.
Now for some recent can only a very good news, we're able to inc. two important agreements in the second cooked off to doesn't swing.
First one was its exclusive worldwide license, we smoke Claire which runs through 2026, we the potential five year extension.
I will ask you fragrance bovies I couldn't be global luxury brand is scheduled for launch in the school still have two dozen 22.
ER and the wouldn't be sold in the middle class tool as well as the buffer stuff, we should still entity for shops.
No glad he is best known for men's women's and children's outerwear collections, which marry the extreme humans natural we've always of city like.
Okay I've been implementing.
[noise] acidic tea brand extension strategy, which currently includes eyewear watches spokeswoman on footwear, making movies I couldn't make luxury brand more widely known and accessible to a wider audience.
And fifth month is usually the entry point for luxury brand experience. We see this could be a reasonably big brand for US I said gained greater recognition and geographic reach and until more product category.
[noise], let's stick and <unk> in recent weeks, what that were 25% stake in Eva above the Tennant company to always been spent fuel.
Well respected online that from and to adult care health care cosmetics and fragrances products.
Oh, just doesn't have a [noise].
Desktop so if you read the location or 99% of businesses Yaki come if.
You will see the side [noise].
So it was most of you up.
You can show up in French and English in Germany, and he doesn't yen and the euro or pound Sterling and fine hundreds of Ron.
Some of these bonds out how else or most of them Oh, though so we we now have a stake you know a competitive products and from school seeps into direct to consumer in town that said.
Disagreements with enhance the introduction of Didnt get its fragrance line type products.
Designed to address specific consumer demand for video distribution channel and accelerate our digital developments.
Oh Gee is using our investment to strengthen its existing organization and the raised its online BBB HM two boffins developed month, nothing in France, but in all you up to.
Excuse it goes up becoming a European economy, a need though popped it seems enforcement.
We're going to take that question soon but I wont to remind our leasing a alphabet hi long we feel had been a thought my boss no well go from the current up our own we still own about 40% of this dog, 45% of his talk of a comping our interest up in sync with our shareholders.
[noise] or so rough and I want to extend that will think too well I'm pleased that supply of other through a dozen they will licenses for the extraordinary default driving it and put the end precedent that <unk> [noise].
ER, so it'll probably tell we can open the floor for quite some please.
Certainly went out of conducting your question answer session.
If you like to be placed into question could you. Please press star one under telephone keypad, a confirmation tone will indicate your line is in the question Q you made press star to if you'd like to move your question from the Q4 participants using speaker equipment, it may be necessary to pick up or headset before pressing star one one moment. Please what we poll for questions.
Our first question three is coming from Joe Altobello from Raymond James Your line is that a lot.
Thanks, Hey, guys good morning.
The first question I want to go back to the trends that you guys are seeing a July and August obviously, you got to sell into <unk> in the quarter were down 70%, but I'm guessing that you exited the quarter a at a much better rate than that given what we saw in April. So he just give a sense or your change that you're seeing in sales in July and August.
Is there any particular, an easier already starting to see the growth in certain markets in Asia.
Well she wants to do a two stuff and so enjoy yacht how else I'll start sure.
Certainly as I as I said in the remarks that the second quarter.
Oh was expected to be the worst.
It took the brunt of the hit of this pandemic.
Oh, we walked into the second quarter in April a with a pretty much a almost a complete shutdown of the retail environment in ER in most countries around around the world.
Even as we started to move a little bit through May and June we started to see Oh, a little bit of a pick up a we discussed a little bit of it in the last conference call, which was in early may.
I'm sitting here today that trend has absolutely continued each month, we're actually exceeding our projections our internal projection does not intend them physician, yeah internal projections, a little up a little bit.
And it seems to be getting better each as each month passes we are still looking at certainly a difficult environment going into Q3, well, hopefully getting better and better as the year progresses.
Sean maybe you could talk a little bit about specific countries are things that <unk> that we're seeing.
Yes, I I shared with you visit feeling between either on a daily basis. Each week all getting bids on the July was better than June that was bits of in May and the August also looks of assistant it'll just looks.
Strong to us.
From a comp from the territory point of view or Asia again, like I said, well left the conference call.
Asia because of it has tried to come out.
And the programs that we haven't seen more specialty pharmacy or Asia is holding up quite nicely.
And you up he's also picking up and the ER. The U.S. is starting to the two by again a good news that we have a lot of inventory. So why book to ship in a very fast let's spend a week, although it can be spots. So we are taking the.
Both of the retail they.
They close he and the.
Like Chris said, we are up for the last two two malls. So we have been beating Oh, well on internal projects are which is a good sign so were quite.
Oh gosh, they feel optimistic we've seen the west.
Phil Costa will not be down the.
As much as a second and fourth quarter.
Between stuff in October with you know how would you ship some some gifts that no October so we think that.
Somebody that's some from.
Fiscal till we go to fulfill so we all have we are well I'm more optimistic than let's say with multiple.
That's very helpful.
Maybe hoping for some some numbers for July and because her [laughter].
You know that I'm not too low to no.
No.
Unless we make it public statements that yeah, we probably will look to be able to reinstate some sort of guidance for the remainder of the year.
Maybe in a in late August or early September.
If the visibility continues to get a little bit more visible.
Then we will do something and put out some guidance at that time, but needless to say a things are looking better I do the worst is behind us.
Okay. That's helpful. In it and then it just secondly on Monday inventories I mean, obviously your inventories are up year over year, but but that to be expected.
Retailer inventories look like as a channel fairly clean at this point.
Hey, very light.
Or all the all the retail those has a very very like the inventory on hand.
That's very well see some some actually quite large shipments are started in July and continuing you know goes.
Okay, great. Thank God.
Thank you Joe.
Thank you next question today is coming from Linda Bolton Weiser from D.A. Davidson Your line is not alive.
Yes, hi.
Hi, Hi, I was just wondering if you could you spend done a great job with getting your expenses down and indeed, you said it would be below 25 million water and it was can you give us sense for now that you're seeing business pick up a little bit.
So why it's so at what rate are you got to maybe start to ramp up those expenses a little bit for the rest of year or do you still think it'll be below 25 million at Florida or are you going to start to ramp that up a little bit as business picks up thanks.
<unk>.
We do know what would they be so from a fixed expense from a fixed expense standpoint, our goal is to try to maintain that for at least the next two or three quarters.
Where when and where we do have a hiring freeze out we're not looking to bring in more personnel of we've we've made plans with respect to to the severe cutting or elimination of certain bonuses and you know that is for the entire year. We're just not just for one quarter or so our goal is to.
To try to to maintain profitability. If we're fortunate enough that the business continues to improve as we've seen Dan or as Sean said in the opening remarks. This should be the first and only lost that into but from a ever reports.
<unk>.
Okay, great and <unk>.
I guess with regard to your equity stake in or is there are still can you talk about what your longer term objectives are with regard to that and do you think that there could be some reluctant.
My other fragrance.
Marketer to carry their product on the web site, knowing that you have an equity stake.
Thanks.
Oh, yeah, unless you want to until the first part that was on silver that pickup.
Well he should be the initial investment is really to get a foothold and and understand.
What can be done.
It's a fragrance into fragrance E com environment. This is one of several different initiatives that we have ongoing.
To build an ecommerce business within our organization.
You know today, there is a changing environment that's out there.
Clearly everybody is reading almost on a daily basis of a retail bankruptcy or some of our retail department stores shedding Oh, hundreds and hundreds of stores.
Nationwide.
The E com environment to something that cannot be ignored. So this is one of as I said several different initiatives to give us an insight into how a fragrance can be successfully sold in the E com environment.
In addition, we can create product odd dedicated for this particular market and use this as a testing round a again, it's all from the standpoint of education.
Yes, and regarding the question about.
Well the competitor, but it doesn't being reluctant to settle on a on the platform, where we have a stake or.
We said a difficult to say philosophy is owned by IZEA matches images of homepage, though in the sequence field.
Doesn't.
Doesn't create any problem for us like that.
Let expect any problems with a with a vicki to let's not forget that a up I find that <unk> pure play here in the in the fragrance category, we do not do skin care, we do they make up.
So a.
The company would be independent yeah, My that's ER and do we.
Or the.
Uh huh.
Since you, but we have with I welcome to get those we do not yeah coal legal problems by I think they cannot be spectrum.
Okay. Thank you very much I appreciate it.
Thank you Linda.
Thank you next question today coming from Wendy Nicholson from Citigroup. Your line is now live.
Hi, guys.
Question, Yes, it's great to see you forging ahead and on establishing new you know relationship and investing in the business, but I'm also curious as to your stance with regard to share repurchases, you're still putting on aton cash on is it still too early from.
Confidence in the business perspective, and liquidity perspective, or it is now the time that you think about buying back more your stock.
Oh, yeah. It would be a you know [laughter]. It's it's an interesting a that's an interesting question.
We would we would rather use some of our cash if if we had excess cash to reinstate or dividend, which we had paid out for at least the last 15 15, or so years buying back stock in a in a company where the two founders still control over 45% to the shares.
Puts us into a liquidity problems.
I mean I speak to investors all the time.
And the end lately over the last several years it had it hasn't been bad because there is volume there is trading there is activity within the stock I remember many many years ago. When the float was much smaller than it is today and are many many more investors sort of this has an obstacle and I don't see.
I think it would be in the company's best interest to go back after that sort of environment. So so right now there is no intentions of buying back stock.
But are we are when we when the board meets a we do discuss the dividend and when we feel comfortable that this pandemic is behind us and out our cash reserves are sufficient enough then we'll reinstate dividends at that time.
Fair enough on <unk>.
Go ahead.
Yeah, but would you be done there's one thing, but oh gosh. It's we have is oh, so oh for potential acquisitions, we think that they all that they will be candidates targets, a thoughtful fluctuations or.
I know the but let's just a one that you have done where more like signs of a new license Kate spade falling and so and see a mall even the nuclear didn't.
We didn't have to pay for for anything but a.
I would prefer to to make the next to use the cash to make an acquisition of into a buyback.
Fair enough.
[laughter] then or.
Underlying consumer demand for fragrances, I mean, just in terms of if people really are going to have on different behavior or you know working from home for a prolonged period of time on social I think differently do you do you have any concerns about just the outlook or.
Our fragrance consumption our usage, if you well or do you still think it's something that you know women and men will well use regularly.
Oh of course, we don't have ER.
Like the studies, but and various countries by countries, but we didn't we didn't the we <unk>, we do not expect a drop.
The use of frequents, maybe because our products are sold 120 different countries and each one maturity.
Okay.
We do not expect dropping to use of.
Oh gosh, maybe could be different from makeup, which I think we'd be it.
We'll have more capabilities in the of influence, but talking to a destocking to reach the though.
The problem to these mall about the trust seeking the stall a but you and that's it.
Switching gears quite so, let's not forget that without getting into a bit to see them, let's stick out to.
The filled on full spoke to a stronger for us in terms of the thing.
So vis vis Uh huh.
Fair enough. Thank you very much like you will take you so much Wendy.
Your next question to me from Steph Wissink from Jefferies. Your line is that a lot.
Thank you good day, everyone I have a follow up question on Wendy's question I'm curious if you can expand any of your life then other fragrance area.
No.
Are you only relegated to your body fragrance are there opportunities to get into areas that <unk> body scan that might be fragrance home, but some of your existing life, but the thing is that you kind of breaking to eat performing like me better I.
That's my first question and then the second one is I understand change in the distribution and how you're thinking about it post call that he could remind us what your penetration was on line going into cobot I'm certainly with the minority acquisition, you're getting some insights into online, but how you're thinking about the evolution of your distribution framework coming out of color.
Thank you.
Okay.
With many other brands that we haven't got license, we have the but even if we won't or to do a.
Home a home fragrance for instance for several of the brands will be to do a kosmicki.
Again, well we are <unk>.
We'd be looking at the demand for these type of product and hide relates to the who runs that you have never before you.
Because we have the right to do a.
Can do that would be successful to do a kendall hobbies bundle had run.
We can we have also the put to be <unk> going to personal care, but again just to be a we'd have to true.
Look of reselling before going into two categories.
Regarding the sick of Buffalo real quick so she's a.
I work distribution network today.
And ER and ER and equal meth ER, we wear and ER.
We will.
And are actually.
Developed in the in the you come out so that's for sure because we were a really counting on that well have a buck though.
<unk> brick and motor spot now or who who can do a business has become s. finances, Mrs. Dot com fit for the outcome and all the or Doug <unk> of the brick and mortar elsewhere doing or a a good job for us.
But we think that are now with the we what we see the distribution we will be working much more hard Buick yeah, much more activity weve or am I wrong, we are.
Well.
So did you get the two to.
To a equipment.
Uh huh.
[noise] towards something yeah, no there it's a it's exactly the reason why one of the reasons why we entered into the agreement and the equity stake in Ah origins perfume. A again. This is this was one area Amazon of course is another.
And we will be trying to work with several different ecommerce partners how to try to build up that part of the business. A we're not going to have certainly not going to ignore the existing brick and mortar the existing perfumeries oh around the world, but certainly we believe that E com will become a big apart.
The overall pie as time goes on so we need to be a we need to be intimately involved with it.
Thank you very much.
Okay. Thank you stuff.
Thank you next question to me is coming from how many worsen from Vws financial your line is that a lot.
Hi can you quantify your previous comments about sales looking better is it is this because the dollar as right now or is it actual unit volumes being sold Oh, <unk> I'm not thinking, but there's other I'm thinking about the units.
Units, while yeah, absolutely absolutely Oh, we would we would always be talking about the units and it's it's volumes that are going that are going through a different sales channels.
As I mentioned that the opening remarks, the the sales that we've seen the orders that are coming in it's a it's a constant flow and each month seems to be getting a little better and better and better and that's why we're expecting certainly that's a third quarter should be substantially better than the second quarter, and then moving on to to the fourth quarter.
And as I said, we are hopeful that we will be able to give you. Some some real quantifiable numbers and some real guidance.
As we approach or early September.
Okay. My other question was though what does your advertising spending in such an environment now, especially given the you're talking about sales increasing would there be a increase in the percentage of AD spends in sales no I do we do not <unk> again, we do not want to who who will increase.
And our spending give each of these series review your where are we going to we're going to do our best to go through a we will make money as I said in the southern fulfill or some investments, especially some of the just before Christmas will happen because it's a but ER.
We we keep our wedding.
Tightening investments to to the mean.
Yeah I'm just wondering again, yes go until he was yeah. I was just gonna say most of most of the major launches that we have were pushed out to 2021 [noise]. So we'd rather see the AD spending go along with the major launches as opposed to Oh, just a continuation of so.
Yes, that's true duration of business.
So we are expecting that I think I said at the end of last quarter or that we're looking at you know in a in p. spend of maybe 17 or 18% for the full year certainly lower than the 21%.
That we had seen in years past.
Okay, but we certainly it's a good question because in a lot more yeah. When we see that are going or how you have in the projected we have the tendency to spend law that's okay.
ER, but here are we going to be a very very reasonable terms of the spend.
Thank you appreciate it thank you.
Thank you we reach of our question answer session I like to turn the floor back over the management for any further closing comment.
Certainly thank you operator, and thank you all for turning in to our.
Second quarter conference call.
As usual if anybody has further questions I can be contacted by by email.
Stay well and stay safe and thank you again bye bye.
Thank you. It does conclude today's teleconference and webcast you may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.