Q1 2022 Inter Parfums Inc Earnings Call

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Greeting and welcome to the inter Parfums first quarter 2022 conference call and webcast at this time all participants are in a listen only mode.

First question.

All of the formal presentation, if anyone should require operator assistance during the conference. Please press star zero on your telephone keypad as a reminder, this conference is being recorded.

I'll now turn the call over to Russell Greenberg Executive Vice President and Chief Financial Officer of Inter Parfums. Mr. Greenberg you may begin.

Okay.

Thank you operator.

Good morning, and welcome to our first quarter conference call.

As always this conference call may contain forward looking statements, which involve known and unknown risks uncertainties.

And the other factors that may cause actual results to be materially different from projected results.

These factors include but are not limited to the risk factors and uncertainties discussed under the heading forward looking statements and risk factors.

Our annual report on Form 10-K for the year ended December 31, 2021 and.

And other reports we file from time to time with the Securities and Exchange Commission.

We do not intend to and undertake no obligation to update the information discussed.

One second.

When we refer to our European based operations, we are primarily talking about sales of prestige fragrance products managed through our 73% owned French subsidiary Inter Parfums SA.

When we discuss our U S. Based operations, we are primarily referring to sales of prestige fragrance products managed through our wholly owned domestic subsidiaries.

Moving on to today's business.

You may recall that on our year end conference call John mentioned that sales in January and February were well ahead of budget.

Well March was more of the same and as a result, 2022 first quarter net sales rose, 26% over Q1 2021.

Which by the way was 37% better than Q1 2020.

For European based operations gross profit margin was 66, 8% and 65, 5% in the first quarters of 2022 and 2021, respectively.

The margin gain in 2022 is primarily the result of the stronger U S dollar.

For U S operations gross profit margin was 53, 9%.

And 53, 2% in the first quarters of 2022, and 'twenty, one respectively with that improvement due to the significant increase in sales, which allowed us to better absorb fixed costs, such as depreciation mostly of tooling and point of sale expenses.

Yeah.

John will address the array of supply chain issues and what we have done to mitigate their impact.

But our ability to transport goods and related cost increases have and will continue to have a negative impact on sales and gross profit margin.

For the foreseeable future and yet it's a little hard to complain when sales and earnings.

Are at record levels.

For European operations, selling general and administrative expenses represented 37.9, and 37, 2% of net sales in the 2022 and 2021 periods.

For U S operations SG&A expenses represented 41.5, and 39, 9% of net sales in the 2022 and 21 periods.

The increase in both segments relate to our investment in promotion and advertising.

In the current first quarter, we spent 13.6% of net sales on promotion and advertising versus 11% in the same period last year.

But even at 13, 6% of net sales we are still below pre pandemic levels.

And the first quarters of 2019, 2018, and 2017 promotion and advertising represented 15.4, 15.6, and 16% of net sales respectively.

As compared to last year, we are in a better position to allocate our advertising and promotion spending such that on an annual basis, we expect to be at approximately 21% of net sales.

Yeah.

Our operating margin was approximately 24% for both the 2022 and 'twenty one.

First quarters, our consolidated effective tax rate was 24% and 27% for the first quarters of 2022 and 21, respectively.

That difference is due primarily to the lower tax rates in France.

After backing out minority interest, we earned $1.10 per diluted share which was 26%.

Head of last year's first quarter.

At March 31st inventory rose to 227 million up from 199 million.

At 2021 year and better for sure, but not yet ideal we closed the quarter with working capital of 484 million, including approximately 265 million in cash cash equivalents and short term investments and.

And we had a working capital ratio of approximately 2.9 to one.

The $125 million of long term debt relates primarily to the acquisition of our new inter Parfums SA corporate headquarters, which is now fully operational.

Yesterday, we affirmed our 2022 guidance, calling for net sales of 975 million.

Resulting in a $3 per diluted share.

However, we will be in a better position to revisit the subject of guidance once the lockdowns in China are lifted.

Our guidance comes with the usual caveat regarding the dollar exchange the Euro dollar exchange rate. The COVID-19 pandemic and of course, the G O. The geopolitical situation in eastern Europe.

Now I will turn the call over to Sean.

Yeah.

So thank you Russ and good morning, everyone.

We are benefiting from a robust fragrance industry across the globe.

North America, our largest market.

<unk> sales growth of 12%.

Despite these problems by our U S distribution center subsidiary.

Comparable club sales in both Western Europe , and Asia Pacific is our second.

Largest market increased 41% our sales in the middle East increased 27% and in Central and South America sales rose 58%.

We most of our shipments made early in the first quarter.

As in Eastern Europe Rose, 15%.

Finally travel retail is making you still but did he come back despite stuffs and stopped stemming from regional pandemic, Richard answers and Lockdowns.

Strong performance of legacy fragrance, and several product launches, notably Kate Spade Sparkle Montblanc legend Red coach Wild Rose and Jess will more contributed to the increase in sales of course incremental says.

I'll see if I got more ungaro, MCM and more glass products, what's factored into our top line growth.

First quarter sales in North America will have been considerably better how do we have not been a bottleneck at their U S distribution subsidiary.

Following a change in the software, but its logistics Buffalo, but resulted in shipping related issues about the hottest Sylvia all deals, which we couldn't fulfill in the first quarter are being shipped in the second quarter.

A big spending that just aging and promotion in the final quarter of 2021 has been being D. V. Dunce in this current year once again about 80% of our investment in promotion are just aging is devoted to digital ads.

So it shouldnt be July can stagger them snapshot duck and Wechat insurance sales in the beauty music acting and spoke to you.

As well as television and Billboards.

As I mentioned on our last call. We are doing more business on Amazon and we have devoted advertising dollars to that April and we are very pleased by the return on investment.

Yeah.

Our multiple engines of growth.

Both of us to capitalize on the heightened demand for fragrance, we served increasing in both brick and mortar and e-commerce venues.

The explanation for the sales and fragrance industry sales growth around a downturn.

Fragrance are increasingly recognized as an affordable luxury.

Sent like session is another new fore since expression.

More men are buying and wearing fragrances.

Social media and the growing number of engine sales are driving fragrance popularity.

During the height of the pandemic the homebound Gen Z population became infatuated with fragrance and it has not diminished.

Says of more expensive higher concentration or the buffer and luxury brands are growing rapidly.

Cool.

Now, China, China, and you I'm sure I will answer your questions on China.

Much is being returned above the lockdowns in China, and yes. These closures have been severely hampering cells and exacerbating supply chain problems.

That said the fragrance opportunity in China is immense with only 9% penetration of urban women and three 3% of men.

That is why much of a big spend in the final part of 2021 was focused on China. We have directed much much of our attention on Virgin Zumba House, who are looking for the most premium luxury and expensive brands.

For us, but I mean sure I got more more clear.

Jimmy Choo and thank Leif and grade you, Matt and thanks to a strong January and February sales, although well UPN best brands almost doubled in China in the first quarter.

Yeah.

Yeah.

Sure.

Then came lockdowns in dozens of cities with guarantees restricted trucking services and factory shutdowns.

Well distribution operations.

And Shanghai ground to a halt nothing came in and the thing went out our sales in China in end of March and April and thus far in May have been reduced Sydney and so has our advertising hopefully soon.

Lockdowns will lift and we look for business to steadily rebuilt.

Moving on while problems still persist the actions initiated in 2021 I've got on the us beyond the critical point in the supply chain side.

We have been carrying more inventory overall softening seem enough components from multiple suppliers are doing well in advance of need utilizing the resources of a world New Italian subsidiary producing closer to where products are sold all of which have reduced our sourcing and <unk>.

Election challenges.

Very pleased to report that to a great extent products consumed in the U S are being produced in the U S and there were Christmas. That's for instance that will be sold in Europe are being made in Europe .

As we relayed then that will play a call well upgrading our inventory management systems and brought on more stuff to address these crucial function.

And now I will turn to the inflation.

The prices of components, including a glass cardboard the wood aluminum has been rising I do that dramatically higher energy and shipping costs.

At the start of the year, we raised prices between three and 5% we haven't raised prices in a number of years. So for the most stock and until recently, we got many more blow back from distributors and retailers, but is changing and we are facing greater resistance now what.

And we are finding is that consumers, who can then we'll do so but those who cannot forgo the doctors I'll make a more affordable selection.

Yeah.

The inflation sphere is a major concern and I don't look forward to our next price increase in the fall.

While some of our west coast somewhere else I've tried ordering ahead of the price increase we've done our best to limit called ink, we don't want to other stuck to somebody else. So if it goes pileup and sitting in inventory.

It is hard to speak about the business implications of the stress of a tragic war in Ukraine without some being heartless, but it's I must needless to say the Russian invasion of Ukraine has negatively impacted our operations in both countries as we adhere to the rig.

Relations and sanction which vary from country to country.

Having made shipments to Russia and the early part of the first quarter of course, though we protected the most of our Russian accounts receivables with credit insurance and payments in advance is a business condition imposed on our Russian distributor.

Despite all the uncertainty stemming from inflation the work in Ukraine.

The temporary China Lockdowns.

Supply chain obstacles 2022 is supposed to be another record year.

Oh official launch of sense for a more clear most of that for them and most of that pull from <unk>.

Begin.

The rollout will do.

He reached three dozen dogs.

During the second quarter, the major advertising and promotion campaign is being activated to support this rollout focusing on the U S. The UK and Japan.

We also have major men's fragrance launches for coach we.

With open road and so we think really.

But most of them will new products, our brand extensions, including Jimmy Choo man that quell launch them on the cloud.

Our timing is good as lung cancer and extension put less strain on the supply chain, because we often use many of the same components as their predecessors.

We are very excited about the donut caravan and you can why fragrances joining go with portfolio starting July one we'll be buying inventory from Mr. Little Deb, a phone or a license fee. So we should be able to hit the ground running.

We have assigned to season brand managers and the new products did reaching Nextgen Unbilled development. Both of these brands have strong legacy issues.

Sure So Michael is.

It's really 2022 issue.

We then issues maybe at least of the best fragrance of all time was in February of this year Women's wear daily included catch me on missed by doing that Karen and at least of the greatest fragrances of all time.

The Huntsville additional brands is ongoing.

We have two types of target voters, we've established businesses and startup enterprises with great potential.

Also culling, our portfolio, allowing smaller less from my seat licenses to expire.

Sure.

And we will talk to I'm sure. During your question about the guidance that we have decided to maintain but they seem to always and our conference calls on why and just buy signs an attractive partner for Brent or mouse, maybe the consistency of this message of the rides.

We didn't see how it goes as a pure play in fragrance, we havent knowhow talents and commitment necessary to grow their license source fragrance business, which translates to higher royalties and greater brand recognitions for the brand owner House our distribution there.

[noise] encompasses now 120 countries each with proficiency in their local markets.

And therefore that also has a very strong balance sheet and motivated management.

Ready to take action when the right opportunities arise.

You've now got even greater bandwidth with our Newberry said Cortez and <unk>.

The operations inflows.

Yeah.

Now operator, you can open the lines for questions.

Okay.

Thank you we will now be conducting a question and answer session. If you would.

I'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is no more question. Kim you May press star two if he'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the sarky one moment. Please while we poll for questions.

Thank you. Our first question comes from Linda Bolton Weiser with D. A Davidson. Please proceed with your question.

Hello, how are you doing.

Thank you great. Congrats thank you.

Hum. So can you just you talked a little bit about China and you know.

It sounds like you are.

Sorry, if I missed it but did you actually say what China, how it performed in the first quarter or in March like how much. It was down in March and can you give us some sense.

Yes, and Marcia M Masri are down more than 60% in April we off downloads saw a double digit high double digits.

We do not think that is going to eat.

Prove it before end of May.

But again I'm still optimistic because I know that when they reopen.

They're going to they're going to need a lot of merchandise. So we have you seen them until you're ready Oh, a warehouse in Shanghai.

Well, we have a distribution center in the Ginza duty free zone in Shanghai is full of products. We are also in production on the Eaton are in transit.

To Hong Kong.

So as soon as China reopens.

I think we'd be back to.

The 222 strong business. So we don't do dropped the ball, but they just have a setback because of the shutdown.

Right I understand and roughly what percent of sales in China for you normalize it like less than 10%.

And and in 2021, China represented approximately 4% of sales so that's somewhere around between $36 million to $40 million.

Okay. Thank you that's helpful and then.

Is there any way to quantify how much the ferragamo garro sales contributed to growth in the quarter like what portion of the of the growth rate.

Yes, I'm I'm sure [laughter] risk and the like.

Yeah.

Uh huh.

Yeah go ahead was what I was going to say, what I was going to say as we had indicated that our you know ferragamo in its heyday was generating sales of somewhere close to $80 million and that got cut in half.

Which is one of the reasons why we were able to <unk> to take over the business itself.

So that would mean that the business overall would be somewhere around 40 to 45 million or so and it's pretty much right on target.

During the second quarter, our sales were very very close to that 10 million a little actually a little over the 10 million Mark.

During the first quarter.

In the first quarter okay.

Okay. Thank you and then finally.

This updating of your inventory management system that you mentioned can you just describe what that entails and do you have to make like duplicative inventory first before safety stock and and what's the timing of the implementation.

The this implementation has been ongoing don't fit.

Sorry go ahead John .

No no go ahead.

The this the implementation is not just the inventory management system, it's our entire ERP system.

This has been ongoing now for.

Almost almost a year.

We are upgrading.

To a cloud based system.

And using third party.

Programs to assist in inventory management warehouse management systems.

Scanning systems and things of that sort for a warehouse it's.

It's a project is as I said, it's been going on for well over a year, we expect to transition it probably sometime between either the third quarter or at year end for 2022.

I mean, it's basically revamping our all of our systems not just inventory management inventory management is really the impetus as to why we entered into this this endeavor.

Okay. Thank you so much I'll pass it on now thanks.

Thank you thank you Linda.

As a reminder, if you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question.

Our next question comes from Stephanie Wissink with Jefferies. Please proceed with your question.

Hi, Good morning. This is grace on for Steph, Thanks for taking our question.

Wondering if you can highlight the pacing of launches for the remainder of the year and then tangentially, how should we be thinking about the quarterly cadence from here. Thank you.

Yes of course, Oh, we can do that.

So for Q1, you remember that we launched a we had a launch for them a tree.

Three blondes.

Coach.

They of course are being number one.

Last fall and fall and fall months will continue with.

With more mens.

The rollout of basically of Jimmy Choo.

Men are cool.

And after that.

Starting July you're going to have the takeover of the doughnut gone and DKNY. So it's not to launch, but it's a new business for.

For us and we've done this tough to quite strong because we're taking over all of our worldwide distribution starting July one.

And <unk> and the rest of the brands, we will have what we call the let's see.

So it's a it's a good year of well, it's a good mix of a blockbuster.

Blockbuster and and flankers.

That's helpful. Thank you.

Sure.

Thank you. Our next question is from <unk> Ahmad.

Of course, then with AWS financial.

Please proceed with your question.

Uh huh.

Talk about how the consumer is reacting with especially in Europe .

The weaker euro and how you know if you're adjusting pricing there to compensate for a weaker euro at all.

Oh, who's the customer in a in Europe .

I'm not it doesn't have to react to it because we have no change I will return retail price.

Euro so even though the dollar is much stronger we have not chonju retail price yet.

But it's true that American products for I will just read just will be a little bit more expensive. It's why we will have to do a second wave of of our pricing.

We have to be careful with price increases I think it has it certainly meets the certain brands that are either more acceptable than others.

For Bush, what was unclear for Oh, gosh <unk> to half of the.

$5.

Retail price out there is not a big deal, but when it comes to more Democratic brands like a guess on my desk on B I think we have to to be disciplined.

And be careful because we want to keep vis a vis a vis customer we don't want them too to go and buy you. Some tickets. So we are monitoring very very carefully.

And we're looking at it very selectively we don't do the same thing for <unk>.

Everywhere.

Hmm.

Yeah, and then my other question was.

Is the current macro environment, making it change any of your plans for next year as far as the release schedule is concerned.

Oh no no we are not changing our plans are actually we are who we get every single the same we had again, we had a big setback with with China, but we know that it's a temporary we have not decreased.

Inventory, we have not decreased their appointments.

The launch shoes, and the Rollouts that we have in China in 2023.

Sooner.

For us so even though we had said back at the end of March in China, even though we cannot ship and you.

I mean, you cannot ship a lot of our products and in Russia of course in Ukraine, Oh, we have maintained our well who says.

Guidance.

And like Chris said in the press release and earlier today.

We will do I hope revisit.

The guidance for for profit and instead.

And says two worlds of June and July when we are sure of it too, but China has reopened.

Okay. Thank you.

Okay. Thank you.

Yeah.

Thank you.

No further questions at this time I'd like to turn the floor back over to management for any closing comments.

Well, thank you all right.

And thank everybody for tuning in today for our conference call.

Just a quick reminder, I will be presenting at the Jefferies Consumer conference, which runs from June 21st and 22nd didn't Nantucket. Thank.

Thank you Steph for the invitation and how nice little be too to be in person at the event.

Do you have any further questions. Please contact me by email.

Stay well and stay safe. Thank you again.

Thank you. This concludes today's conference you may disconnect at this time.

Thank you for your patience.

Okay.

Okay.

Okay.

Okay.

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