Q3 2020 Inter Parfums Inc Earnings Call
[music].
And gentlemen, thank you for standing by greetings and welcome to the inter Parfums third quarter 2020 earnings Conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad as art.
This conference is being recorded it is now my pleasure to introduce your host Russell Greenberg Executive Vice President and Chief Financial Officer of Inter Parfums. Thank you Sir you may begin.
Well, thank you operator.
Good morning.
And welcome to our 2023rd quarter Conference call.
As usual I must again 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 heading forward looking statements and risk factors in.
In our annual report on form 10-K for the year ended December 31st 2019.
The quarterly report on form 10-Q for the third quarter ended September Thirtyth 2020.
And other reports we file from time to time with the Securities and Exchange Commission.
We do not intend to and undertakes no duty to update the information discussed.
And of course. This reminder, when we refer to our European based operations. We are primarily talking about sales of prestige fragrance products.
Conducted through our 73% on French subsidiary Inter Parfums, let's say.
When we discuss our U.S. based operations.
We are primarily referring to the sales of prestige fragrance products conducted through our wholly owned domestic subsidiaries.
Because of the recent weakness in the value of the dollar versus the Euro I would also like to remind listeners that a week's U.S. dollar.
As a favorable impact on our net sales.
<unk> gross margins are negatively affected.
This is because over 40% of net sales of our European operations.
Are denominated in us dollars, while almost all costs of those operations are incurred in euro.
The average dollar Euro exchange rate for the 2023rd quarter was 1.17 as compared to 1.11 in the third quarter of 2019.
That also compares to the 1.10 in the second quarter of 2020.
Needless to say, we were very pleased with our third quarter results.
Rather than we read the news release that we issued yesterday afternoon. Let me tell you what we think could be important takeaways.
On a 16% decline in comparable quarter sales and a weaker dollar.
Our gross margin expanded 70 basis points.
Yes, you can a rose only 30 basis points, yielding a 30 basis point improvement in our operating margin.
Even with social distancing restrictions.
We opening up stores brought customers back.
And to add to that a swelling E commerce sales by our retail and E tail customers.
As a result, our sales increased in each month since April.
Admittedly the 2022nd quarter wasn't an aberration.
But humor me as I compare the third quarter to the lows of the second quarter.
Third quarter sales increased 224%.
And despite the headwind of the nearly 6% decline in the average Euro dollar exchange rate gross margin rose 630 basis points.
Positive leverage which resumed in our third quarter operating margin, which came in at 19.5%, which actually so.
Slightly exceeded the 19.2% achieved in the corresponding period of the prior year.
For our European operations, the third quarter gross profit margin was 62.4%.
As compared to 62.8% in last year's third quarter with the weekend dollar responsible for most of that decline.
As we discussed on our last conference call.
The assumption of a return liability for products sold by a former licensee of a brand license, which we acquired in 2019 put a drag on the nine month gross profit margin, which came in at 62.3% in the current period versus 64.7%.
Through the first nine months of 2019.
For our U.S. operations third quarter gross profit margin was 52.5% up from 51% in the prior year's third quarter.
And that modest improvement was basically attributed to product mix.
Without furloughing or discharging employees and without compromising our business plans or future growth prospects, we were able to cut expenses right.
Rightsizing, our operations to the lower sales volume.
As we reported yesterday as chicken a expenses were reduced by 15.4% as compared to last years third quarter.
And represented 41% of net sales just slightly more than the 40.7% in the third quarter of 2019.
For European operations SGX S. Chikane expenses declined 11.4% on a 9.6% drop in sales.
And for our U.S. operations, which carry a higher fixed costs that are more difficult to leverage as efficiently as those of our European operations.
For our U.S. operations SGN, a expenses decreased 29.2% on a 35.1% decline in net sales.
We continue to support existing lines with promotion and advertising but.
But at a much reduced level.
Cutting approximately 11 million out of the expense column and as a result promotion and advertising represented 10.9% of current quarter net sales as compared to 15.0% in last year's first the third quarter.
Also as I mentioned on our last call our license stores have been very cooperative and accommodating during this period waving or significantly reducing 2020 minimum royalty guarantees.
Royalty expense represented 7.3% of net sales for the current third quarter as compared to 7.4% in last years third quarter.
Our effective tax rate for European operations came in at 28% for the nine months ended September Thirtyth 2020.
As compared to 30% for the corresponding period of the prior year.
And that reduction is due to favorable tax rate.
In other jurisdictions, where our European operations also conduct business, such as Singapore, Switzerland, and the United States.
As a result, as a result of the true up of our 2019 tax accrual.
For U.S. operations income taxes resulted in a nominal benefit for the nine months ended September as compared to an expense of approximately 16.6% for the corresponding period of the prior year.
[noise], thus far in 2020 accounts receivable haven't been as it has not been as a serious issue as much of our receivables were covered by insurance.
While accounts receivable is up considerably since mid year the upturn in sales explains the cause.
But the important part of this discussion is the improvement in collection activity.
As days sales outstanding dropped to 78 days as compared to 84 days in last year's third quarter.
Our balance sheet remains strong we closed the quarter with working capital of 442.1 million, including approximately 204 million in cash cash equivalents and short term investments.
We have a working capital ratio of 4.5 to one.
And 49 million in untapped credit facilities with only 19.4% for 19.4 million of long term debt.
Which includes the borrowings made in connection with our recent equity stake in the parent company of origins perfumes Dot fr.
Now I will return the call over to Jon for a closer look at how we are doing and what we are doing.
Joel.
Yes, Thank you Ross and good morning, everyone.
As we reported the business has rebounded phone, but vicki I well best expectations.
For our European operations, the filter book to a rate of decline in says slowed to 9.6% which is quite good.
Not surprisingly most of our larger brands have declining comparable cost of sense, but do we have two exceptions coach and lava.
[noise] coach fragrance says have benefited from the introduction of goods dreams that when you have is you would love a fragrance sales have been doing exceptionally well.
Two markets, where the brand is very popular Asia and eastern Europe.
Unlike European operations, none of our U.S. based on how the major product launch in 2020 and as a result, he says declined 35% from last years first quarter.
It is time to look for world.
Two dozen 21 looks to be very big year for Us. In addition to flankers and limited edition and gift collections, we have a number of major launches.
Well I'll just run the mobile.
Yes, I didn't get it.
Explorer too.
Two a fragrance family and the <unk> also has a woman signature scent into work.
Well, Jimmy Choo, we launch a product I won't shoot is scheduled for winter two dozen twin 21.
And we also have a new sense for horse on for love up both for a woman's coming to market later in the year.
In addition, we are very excited about our first the Kate Spade fragrance launch, which will end view in R&D in 2021.
For us up really shine, whose stuff the euro weve, a relaunch of M.C.M. first woman's fragrance.
Fragrance.
Good thing Jin Xin really knows rolling out into the first and second quarters.
I think you'd be impressed by the Boto design, which was inspired by Jay can you.
See him back back.
Oh, well newest got that on the fragrance called idly by we also debuted in the first quarter and similarly on the spec edge design draws from your God, 11th or how did you buy back.
The new wholly still do cool Kenyan escaped comes to market in the first quarter.
And highly anticipated be levied though.
Initial blockbuster for guess, we'll launch in the spring.
The new blockbuster pillar for the Combi the using the bottom line for the second quarter.
And really relaunch the graph Lindsay Lohan that collection.
In the second quarter in.
In the fourth quarter.
We will give you the revenue unless we are sky.
In the Asia.
And so this is for the products, we got the numbers on the very <unk> on December two we announced our 2021 guidance.
[noise], we recognize that the postpone the mix retail will do will be different in fact, it already is.
The challenges we face include store closings restructurings bankruptcies de stocking and stricter working capital control.
And then he's coupled with the usual issues and consume sits just go and see where the T.D. supply chain interruptions diaries changes in regulation, but we have always been able to adjust and sold the problem at hand.
That brings me to a discussion on on travel retail because we've we've had a lot of questions on travel retail and as you know there's been an important part of our business we.
<unk> International travel severely restricted the duty free segment has nearly ground to a halt.
The resumption of brick and mortar stores and the Camillus boom I've helped fill that gap.
But I would like briefly to explain why we met you may have read about the search in travel retail sales in China, specifically in Hainan an island in China.
[noise] to Anchorage urge to encourage Chinese Chinese people to shop in Chinese businesses revenue of in South Korea. For example, the Chinese government has lifted restrictions on purchase limitation.
Some Chinese people are buying large amount of goods, bringing them back to the locals and sending them.
Its struggle retail, but not international duty free shopping.
For the <unk> sold their butts fragrance represents really a small fraction of the beauty products of the Chinese customer would buy more skin care.
In the fragrance.
[noise], but then we come back if you have questions on the.
Just one line one less thing before we move to questions.
Buffers, we present this truly at the Jefferies retail in Britain Summit 2020 on Thursday December failed.
As well as the Davidson did some consumer group conference on March on March felt of next year.
So now operator, you can open the floor for questions.
Thank you, ladies and gentlemen, if you would like to ask a question at this time. Please press star one on your telephone keypad, a confirmation kindly indicate that your line is in the question queue.
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Our first question comes from the line of Joe Altobello with Raymond James. Please proceed with your question.
Hey, guys good morning.
Question kind of Big picture, how do we think.
About the global fragrance market 21, if we feel good that we do make substantial progress on the virus and there will be more travel and people going out a at the same time your launch schedule.
Pretty busy and I would think it's the same for almost every other fragrance company. That's that's been delaying launches throughout the year. So in a year with with so many launches are both yourselves and others is there you're that some of those losses get crowded out and also are there any operation or supply chain issues.
You guys foresee what all of these launches going on at once.
[noise] <unk>. Thank you for your question regarding give the calendar have launches.
Fall and next to we did well there are you ready for these launches because some of them shoot up happen. This year and we are just delayed them. So from a supply chain point of view inventory and execution point of view I'm not worried at all.
As I said before it's maybe one of one of these unusual you are aware we have almost a major launch on every bronze, but we have a Jimmy choo.
We'll show Us a mobile.
Oh on peace food and this we guess or I can then all of all of our brands will have vocal.
Blockbuster so it's quite unusual the reaction of the trade that of course, we have presented all these products is quite good but again, a lack of visibility that we have will make us.
Of course, a conservative you know approach for when we're going to give you. Some some projections early December for for next year.
So we think that <unk>, even countries or stay open.
We have no problem to didn't even have a great you know, but if it's like it is today where the.
France is no looked up the UK either closed or maybe they will reopen just before Christmas.
Very difficult to.
Two.
Food <unk> to to achieve what we want to do but oh by the.
We are optimistic we are cautiously optimistic we will we have big plans in terms of advertising goes spending go to <unk>. So everything is in place.
The self go after it was really a reassuring for everybody, but we were we were shooting down to leave it to of course, we didn't lose lose our Dutch but oh, it's really reassuring to see that too, but we do do very good feels close to beating the streets of course and the the the first non bills, but we have.
So full of the beginning of a full quarter of he's also a bit of an anticipated. So so we are well, okay, but difficult to to to have a bigger visibility unless you want to add something.
Yeah, I just want to stress I. The there really is no issues as John mentioned with respect to supply chain because we've we've even had additional time in order to get products ready.
For the launch and to actually show the products to our distribution network around the world. The only other thing that I would like to address.
There is the fact that a substantial influx of new launches its not unusual for the fragrance industry.
Even in a in normal times in any one year you could have anywhere from 1000 to 1500, I, if not even more than that a new launch. It's a I think it will be a little exaggerated, especially since not only at the bar farm, but many of our competitors have also delayed certain launches.
But I don't think that that is something that is very very unusual for this industry.
So we are looking forward to it and as Sean said if if.
If if things with respect to the pandemic subside, a little bit or don't get get much worse than they are today were cautiously optimistic for the future.
That's very helpful guys. Thank you and then maybe if I could shift gears a bit.
Hey.
Good for you right you mentioned in the quarter I guess you never got can you ever here, but if you look at the you know the detail it was mostly a and b in royalty back I think your overheads were actually up modestly.
You're not sick opposite thing actually a quarter over quarter.
Some catch up.
From Q2 or is that $35 million to $36 million a quarter in terms of overhead.
A good run rate.
<unk>.
Peter.
[laughter] interesting.
Your your numbers are a pretty a pretty close to two two right on as a matter of fact, we reported yesterday of 65.8 million and if you took out promo royalty, even freight and service fees, which are the typical variable expenses that we that we normally disclose you end up at around 33.
Point 33 million or so however, Joe there there are additional variable expenses that.
That are also included in those numbers.
We went on record to indicating that we think that the fixed expenses should run somewhere around that 25 million per quarter, and I think we're still pretty much right on target with that.
But keep in mind compared to the second quarter, our sales are up 200, and some odd percent.
And with that is going to come other variable expenses that we don't highlight as part of our normal ongoing quarterly reporting mechanism.
Okay.
Thank you appreciate it.
No problem Trump.
Thank you. Our next question comes from Linda Bolton Weiser with D.A. Davidson. Please proceed with your question.
Yes, hi, I'm actually when hi, when l'oreal talked about their corridor. They actually talk about the fact that they think they've gained market share because they went ahead with certain launches and I think they highlighted some fragrance areas and Coty has been talking about some.
Accessing their fragrance area as well so do you think that you've lost some market share by delaying those launches.
[noise], Oh, I I read through long island and could see.
Oh, I see that the amount of the launches vis vis vis happens we're really in the in the first quarter and what was the what was done in the second quarter was really new launches, but they couldn't stop so I don't think that the do you did you done on the boost.
And due to you I'm glad to have it too we have delayed I will launch shoes.
The dispute the second the second poster between a vena, whose terrible the film cost who some of the countries where.
Well open but some of the countries with home school, you getting back to normal trying to unload inventory that they had before who I have absolutely no regret or on the <unk> what we've done.
And I do not think that we have lost the.
Market share a four Oh woe products I think that Oh, we when we look at the way we look at a D. said the end of the Christmas season, when at the end of the year. When we look at though NPV I don't I'm I'm sure, but who knows.
Well her products, we love loves to market. If the market is done in general I don't think thats, well more down than the market.
Right.
Okay. Thank thank you very much.
Thank you mentioned it.
Thank you. Our next question comes from Steph Wissink with Jefferies. Please proceed with your question.
Thanks, Good morning, everyone I want to follow up on Joe's earlier question on again and just looking at the guidance rest for the year and it doesn't quite a fourth quarter is down similarly to the third quarter, but your earnings are somewhat lower and so I wanted to just understand a little bit about whats happening mechanically in the gross margin in the S. DNA balance.
In Q4 that would imply a sharper degradation in earnings.
But typically you know we've only really given guidance on the on the sales and earnings number for Q4 or the.
The the biggest variable in connection with Q4 is the amount of advertising that we're going to put into place a part of that is actually being decided as we speak and that really is going to depend on the visibility that we see within the retail marketplace.
There are several different programs that are kind of in a wait and see mode. Depending upon how sales continue to trend through the rest of November and then into early December and that therefore, where we're really trying to just be as as we usually are a little bit concerned.
And in case, we see the momentum pick up and we want to put more advertising dollars a into the market.
And that's weird, though that's where those variables really come from.
Okay. That's really helpful. And then question for both of you actually two part question is just the disclosure you gave on Hainan Island I thought was really interesting that fragrance under index in other categories within beauty, but that also customers may be buying up to that government issued level and taking some of that merchandise back and reselling. It he could just talk a lot.
A bit more about observations around what we would call the local market travel retail versus your cross border travel retail.
And then also just a clarification question on Dotcom can you just remind us how your licensing work with some of your big brands like Montblanc and they too are you selling wholesale tintos dot com, if you're selling those goods through the brand dotcom. Thank you.
[noise] more to go back to a renowned because everybody's talking about that discuss briefly had nine was known for the beaches and the and the and the shopping but today you have a.
Hundreds all I'm, what am I talking tens of thousands of people who go to hang on to the byproducts. It did involve a suitcase and they bring it back.
In China, and the and the recently to so it's a it's just some my wholesale I've seen this a week, we all have seen decent.
No.
When the Chinese people were traveling to [noise].
Yeah.
Yeah. They were also coming Weve suitcases and bringing back the products.
Before she is really to take advantage of a of pricing visas.
The 25% to 55% of the price differences between now and then and the and and them in China. So that's why people are doing it and it's really a what we call the duty.
Duty free or travel retail <unk> not feeling for me I consider it deserves.
And so how should they say look cool the transfer of Oh of merchandise.
When the real travel retail is going to get back to normal movie season.
We think it's not full now it's not for a mixture between maybe tick or are we seeing good three years before we go back to where we were in a dozen names.
[noise]. So the season my answer on that none of US you want to answer on the how do we sell them, yeah, Andy and sure on that other than most of our sales and the dotcom arena or at most of our licenses.
Certainly always allow us to sell through a the dot com of any brick and mortar customer.
That we sell to so whether or not we sell to support or to Macy's or two.
Or or even in the international markets to do glass or or or Howard's or are any of those major retailers around the world. We're always are able to sell product to their through their dot com a environment.
In addition in most of our licenses. It also allows us to.
To go through other dotcom venues and those are approved on a case by case basis in other words here in the United States. If we wanted to to sell through Amazon for example in their beauty.
Segment.
We would normally go back to license worsened and life and they typically would give us permission to sell through those are different venues, but.
But most of our dotcom sales today are through our brick and mortar customers.
Thank you.
Thank you. Our next question comes from the line up on that course, then what BW West financial. Please proceed with your question.
Hi, Thank you for taking the question a this is I hate calling in for Harman.
Could you provide a little bit of background on what the current channel inventory is.
[noise] this cool I did not but to win where <unk> when we talk to a warehouse distributors and when we talk to have.
The retailers.
That's we send you Vicki.
We see that the level of inventory is still very very.
Reasonable value.
For a month or two we ship a lot of a match on that but yeah. It means that the people cannot wait too long to see the inventory so the amount of goods into the channel Oh I'm not very high.
But it doesn't mean it has been like this fall for the do it for the whole year.
Okay and I just heard you you gave a response, where you think the the travel fails.
Let me turn to 2019 levels for another three years, but as you're looking at this launch calendar.
What kind of thinking is going into the production level of production and how much inventory you do put in the channel.
[noise] [noise] <unk>, so I think yes roster.
I just want to turn to to print to bring up to the attention is that you know travel retail.
Still only represents or only represented 15% to 20% of ourselves.
In 2019 now some of that of course is being made up by brick and mortar and as John mentioned in a in Hainan Province in China, you have a different types of Oh, I don't want to call. It a of travel retail maybe not international travel retail that is taking place.
So that's not going to have a significant or or a very very significant impact in our expectations for new product launches a have to travel retail S. In the historic.
Norm that we that we know of you know there is it's a matter of that can only come back once customers and people are are.
Our our back to traveling and freely international travel vacationing and things of that sort and that very well may take until the end of of 2021 or early 2022, but it's going to be a a process you know that will happen in time, but I don't think it's going to.
Have a major is a significant impact in in the ER and the distribution of our product from the standpoint of of new product launches.
Yeah, you know, 90% 80 or 90% of our sales are done.
Then.
Outside of travel retail so when you ask about the alone shoes for all the brands that we have will have launches in the <unk>.
100 countries, where we sell our product than it would be in the new Macy's Oh in Macy's that you know get any lets say yet, though in the Stifel and say for the gum.
And we can absolutely you.
Who leave with the with the travel retail that will be a.
In in trouble for the next Oh two years at least.
I apologize I I meant that as just a broadening topic not just on travel retail because I know earlier in the call you were discussing.
As you know even with the vaccine it's hard to tell when normalizing and in return. So I'm just trying to get a better picture of what you or production output may look like given that circumstance of the unknown. We get is it are you anticipating a normal launch are you anticipating like <unk>.
What levels are you putting into calculating how much production do you put out and what you anticipate the channel inventory will look like giving there's so many variables with what.
What the true reopening is going to look like.
Yeah. It's a it's a good question because how much time are we going to set up a new product. He did she could a little bit too again, well not the stuff that we've been doing this for 50 years, we have with ideas of what can be said how much space. These are located in the what's still in what the country. So all our teams all of it.
<unk> everywhere in the world.
Oh, we're working to make sure that we have a space the and I'm also aware of a supply chain that you bought months. He's are working hard to you know there too.
To improve the delivery of products. This can you do you will have a conservative approach because this is a way we are.
We were for instance to Kennedy to lead by surprise by the strength of <unk>.
So <unk> to <unk>.
And we will of course are out of stock Oh, four or more for two months in the in the fourth quarter, we'd be back into well back in stock in the fourth quarter, but.
But for these new launches we.
We are because they are from a weak they are blockbusters from most of I will be your brands will take like receiver approach and we make sure that we ought to be not enough inventory to supply.
Now you have your accounts.
Well, thank you very much.
Thank you we have no additional questions at this time, so I'd like to pass the floor back over to Mr. Green bar for any additional closing comments.
Okay. Okay. Thank you Jesse.
Thank you all for joining us today on the on the conference call.
As usual if anybody does have any further questions or need some further discussion please.
Please contact me by email a everybody please stay well and stay safe. Thank you again for joining us today.
Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation and you may disconnect your lines at this time.
[noise].