Q2 2022 Inter Parfums Inc Earnings Call
[music].
Greetings and welcome to the inter Parfums second quarter 2022 conference call and webcast.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
If you'd like to ask a question press star one on your telephone keypad.
If anyone should require operator assistance during this conference press Star Zero on your telephone keypad. Please note that this conference is being recorded.
As a reminder, this conference.
Also 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 inter Parfums annual report on Form 10-K for the year ended December 31, 2021, and other reports inter parfums files from time to time with the securities.
And Exchange Commission.
Each of our firm does not intend to and undertakes no duty to update the information discussed.
I will now turn the call over to Jamba, Dar chairman and CEO of inter Parfums misnomer Dar you may begin.
Good morning, everyone and thank you for participating in today's call in the past our CFO Russ Greenberg start the ball rolling but today I would think the elite because this is Russ final conference call slot that buffer and on behalf of our entire stuff.
Both of them do you like this I want to say thank you to us.
P S of loyal and did you get the service as you know it has been announced that the US would be retiring next month. He has held in well deserved to devote more time to his family and the activities. He most enjoys.
As we announced in June Michele.
Officially took over the CFO reins on September six Michelle and the depth looks strong jobs. We have worked with him in various capacities are various companies in the past.
He was most recently.
That is still out there.
Because he doesn't financing strategy, providing strategy, although insightful the fragrance category, where he led a team of finance professionals across the globe as a key member of Signor.
Signor Finance leader.
Michelle suites also spent more than 20 are booked on gamble when he's finally, they told was divisional CFO global prestige fragrance, namely leading a team of 90 people and Timothy spearheading the divestiture of the television to quit.
Also we have included in our proxy material to keep the ball see trustees vacating at the annual meeting of shareholders on September nine two dozen puts too. So again. Thank you Russ for his time with us.
For anyone new to us.
Keep in mind that when we spoke to a well European based operations. We are talking about that was seven 2% on French subsidiary.
Uh-huh S. A y O L U S based operations research to our wholly owned domestic subsidiaries.
Both sides of the Atlantic all businesses find the prestige.
Prestige fragrance unrelated product.
Oh I will.
To address our 2022 guidance, which we raised last month to approximate the 1 billion net sales and diluted EPS of $3.25.
You don't want to have a thoughtful any length of time, you'll know that are who are traditionally a cautious while we are halfway through the film cost do you still need to have a stronger Scottsdale and business is solid our visibility is clouded by the in predicting the BD Inc.
The ability of international tumbling.
Still in Europe , China, and Taiwan are among the most newsworthy today.
But tomorrow, who knows we have a crisis will be.
While we try to factor into our guidance any implications of regional retail jumps in COVID-19, and currency fluctuations forecasting is imperfect and we prefer to adjust guidance. After we book all of those.
Moving on.
The fragrance industry hasn't been on an upward trajectory around the world and so has our business.
Year to date, North America, our largest market achieved sales growth of 8%. Despite the I T problems by our U S distribution subsidiaries for European based products and the strength of the dollar compared to where you were.
The first house, Western Europe , and Asia Pacific, Our second and third largest markets grew sales by 40 and 59% respectively.
Our sales in the middle East increased by 51% and in Central and South America sales rose 55%.
Turning to our sales and he's still in Europe declined two of us.
Probably still by 14% Fortunately well Fortunately, we're going to see a renaissance in travel retail I do a good deal of trouble and what I see a black flies and E gift shop, this duty free and inside stores.
Fragrances lost in the first quarter continue to rollout the second notably Kate Spade Sparkle.
Blah lesion red coach one rules and get one more.
The incremental sales, obviously I got more gung Ho and MCM products also factored into our topline growth.
And we have been enjoying a big success with our Dubuque dual form unclear.
You bet, where cells release that small we talk about the harvest strength of a dollar masked our progress for European based product in the second quarter.
Six months to go I'll, just ask a funding.
Take our three largest brands montblanc, just how says with 25%.
Of last year in Europe , but the only 14% in dollars Jimmy Choo first house.
Says rose, 16% in euro and under 6% in dollars coach says were up 29% in euro, but just 17% in dollars.
Our full floor, just Brian I'm guess experienced first half sales.
Sales growth of 37%, which affects collection last year and will movie share guest frequency and grooming products have kept chilled market your market share among the mens.
Some good things are happening with our midsized brands to take about Colombia, and Fitch just how sales are 50% ahead of last year, we were lounging machines fusion of sales coming from Europe .
Still a very small part of our business travel that many peers are starting to percolate, we're looking to double for sales to be sure the Atlantis and Dubai, which makes it which may be the most deluxe hotel.
Income tilt recently has selected the graph as its travel I mean T spot now.
I got more actually so we can be from some in many hotels such as lung gondola, one can think ski and just hope on Turkish Airlines.
Van continued to beat Us to play you off with Sophie tell chain.
Well I'm very pleased to welcome Donna Karan and DKNY to our portfolio, we have assembled a team of real pools for these brands and acquired inventory from the former licensee who will also be producing they guess he sends force who you haven't.
So we are fully prepared to build upon the appeal of these names.
We have many new product launches in the pipeline for the coming year, but I could describe most of them as brand extensions and new pillows. Fortunately, we do not need major launches for our business to continue to grow.
Some of our best sellers have been around for years, even decades.
We have also decided to hold off on major product launches folks I've got more than I can do you can weigh on lingo until 2020 for.
Our next yeah, but you Frank and extensions in the works for all of them will be able to disclose more about the 2023 plans on our next conference call.
<unk>.
And yes, well on the.
Look out for all new names, we have two types of targets voice with established businesses and fragrance often for aspiration or brands with great potential.
Now a least a fragrance partner for brands that fit one of most profiles high though there is no shortage of competitors.
But that buffer is on the cusp of an anticipated gross sales I, sometimes feel like the CEO of a 40 year old start up too.
To prepare for this expected growth. We see ahead, we have taken on more space.
The oxygen to walk, though and of course, well established influenced by recent Geneva.
Our new Jersey distribution warehouses undergoing refurbishment and <unk>.
Also our inventory management, and our enterprise resource planning ERP systems overall.
Yeah. The implementation is moving forward.
We're getting closer to the finish line.
It is an ambitious.
Mover encompassing a cloud based system using cell therapy programs to assist in inventory and warehouse management scanning systems and related functions. We expect the transition to fully complete by year end.
On a somewhat related.
A related topic you may have seen the July 10th issue of the Wall Street Journal in which our school to do about that well move away from soft drink in China for our U S operations.
One of the lessons learned in the aftermath of Covid was that even though maybe in China components are cheaper getting them, where they were needed became impossible task.
Would you say the shifting operations back to the U S from China and for that matter all the countries where in the past.
She played a and access to labor factory capacity at weighted cost of shipping products across Yorkshire, even novice Shanghai has reopened and shipping rates and shipping rates have come down well heeled, reducing our dependence on China because with logistics.
Too often impossible.
We have engaged a U S players and nearly 70% of the box are being produced by U S companies.
Planning to have nearly all feeling an assembly operation in the U S and in Europe by 2024 and that is company wide.
While China, while China is becoming less important to us as a supplier it is becoming increasingly important as a market.
Chinese shoppers, a big spend though and fine fragrance market penetration has been growing but it is still in its infancy.
We have stepped up our advertising engage key opinion leaders celebrities of all sorts, including up-and-coming keep up groups, which are extraordinarily popular in China, Lavazza I got more and of course, unless we occupy much of that effort.
We're all learning to adapt to inflation will moderate and regular price increase all becoming the norm.
That means becoming more proficient at projecting cost and adapting our pricing two years into the future.
At the start of 2022, we've raised prices on average, 5% and another price increase of between three and 6% depending upon the region.
This will not.
Now I will turn the call over to Russ for some of the financial review.
Yeah.
Good morning, everyone.
And thank you John for your kind words.
Over the past three decades, I have been part of a winning team.
That is made into perform a rapidly growing highly respected global fragrance enterprise I know that I am leaving the company in excellent hands.
Let's move on to business.
Foreign currency exchange rates have had a significant impact on our 2022 reported results.
The U S dollar relative to the euro.
Hasn't been this strong for about five years.
And as you must know by now a strong U S. Dollar has a negative impact on our sales.
However.
A strong dollar increases gross margin.
Because almost 50% of net sales all of our European operations are denominated in U S dollars, while almost all of its costs are incurred in euro.
For European based operations overall gross profit margin was about the same just under 70%.
In the second quarter in the second quarter of both 2022 and 2021.
The gross margin benefit from currency fluctuation and price increases was offset by increased transportation and component costs.
In addition, our U S sales of European based products were hampered in the early part of the second quarter by shipping related issues. Following a change in the distribution software by our logistics Park.
I will also remind you that we generate higher margins for sales by our own distribution subsidiaries versus gross margins that are generated on sales to an affiliated distributors.
Well United States operations gross profit margin was 100 basis points ahead of the second quarter of 2021 with the improvement due to the 69% increase in net sales, which enabled us to better absorb fixed costs, such as depreciation and point of sale expenses.
On a consolidated basis SG&A expense for the second quarter was 24% and represented 44% of net sales.
In last year's second quarter, they were 42% of net sales.
For European operations, SG&A expenses represented 47, and 44% of net sales in 2022, and 2021 second quarters, respectively.
For U S operations SG&A expenses represented 38, and 36% of second quarter net sales.
In the 2022 and 2021 periods respectively.
You will recall that throughout 2021 net sales blasted through expectations and we tried to play catch up on the advertising and promotion.
As we have been reporting we are spending more than last year on A&P, both in dollars and as a percentage of net sales.
Thus far this year, we've invested slightly more than $80 million or nearly 16% of net sales on A&P as compared to 55 million or 14% of net sales at mid year 2021.
Based upon our 1 billion sales guidance.
You can expect another 120 million of such expenditures to meet our A&P target of 21% of net sales.
Once again, usually the fourth quarter is when we activate the big A&P spend to both drive holiday sales.
Keep the momentum going in the first quarter or the following year.
Just a point that we've made in the first conference call that still applies while second quarter A&P expenditures were up 38% and represented 19% of net sales. This is still below pre pandemic levels.
In both the second quarters of 2019, and 2018 promotion and advertising represented 22% of net sales.
Our second quarter operating margin last year was an exceptional 21 and a half per se and this year. It came in at 18.6.
Going back to pre pandemic levels, our 2019 second quarter operating margin was 13 and a half and in 2018. It was 12.6.
Uh huh.
Our consolidated effective tax rate was 24% for the first half of 'twenty 2022.
And that compares to 30% for the same period last year.
You may recall that in 2021, our tax Bill included a settlement with the French tax authorities, which along with a higher French corporate tax rate accounted for the 20% decline.
In our overall tax rate.
From a cash flow perspective mid year inventory levels increased 41% to 266 million from 2021 year end.
We closed the quarter with working capital of $445 million, including approximately 196 million in cash cash equivalents and short term investments.
And now we're working capital ratio was 2.9 to one.
B 117 million of long term debt relates primarily to the acquisition of the new headquarters for inter Parfums SA, which today is fully operational and absolutely fabulous.
Now operator, please open the line for questions.
Thank you and at this time, we'll be conducting our question and answer session.
If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the question queue.
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Our first question comes from Linda Bolton Weiser with D. A Davidson. Please go ahead.
Yeah.
Thanks, well Ross.
Well to you.
Gratulation on everything you've done and good luck in the future.
Thank you Linda.
Miss you so just to start out in the quarter I guess the thing that was most different from our expectations was the gross margin and you know I guess it would benefit from the weaker euro, but yeah. It was down year over year and down sequentially. So can you.
Just explain a little bit more I know you started to give some color, but can you just if there's any way you can quantify certain impacts them that would be helpful. And then kind of what do you expect maybe gross margin in the second half roughly thanks.
No problem you know, it's it's really quite a little bit of an anomaly because if you look at the details between both of our European operations and U S operations.
Margin actually went up.
I read in the European operations that went from 66, 8% to 66, 9% and then the U S operations. They went from 53.3% too.
254.3%, they're now I'm talking here for the for the three months ended June .
You have the exact at almost the same effect for the six months as well. The reason the consolidated gross margin appears to have declined is really the mix between the U S operations and European operations, we have.
And and they put it for the six months.
We have a 72% increase in sales for Europe for U S operations compared to a 9% increase for European operations and of course that 9% is is low because of the exchange rates, but it's the overall mix in U S dollars of a higher U S.
Business.
That has created this phenomenally of appearing as if gross margins actually declined.
Overall, the U S. We would normally expect the foreign currency exchange rates.
Together.
Uh huh.
Clearly together with some price increases clearly mitigated the incremental cost some components and transportation are in both European and the United States operations.
So oh, so overall, we were actually very pleased to see continued expansion.
Going on into the future.
One of the things that also as I mentioned in my remarks that helps our gross margin is when we can increase sales from our U S distribution subsidiaries as.
As we continue to ship more wholesale product through our own distribution subsidiaries in the U S. As opposed to third party distributors, we should see continued expansion within the gross margin.
Yeah.
Okay. Thank you that's very helpful. And then just said issue that you've talked about with the software changeover.
What I understand is that in your own captive distributor organization that issue or is it an outside party and then is that all cleared up now or are all the impacts behind you or will there still be some impacts going forward.
When when we are when we took when we started our own U S distribution, we partnered with a third party in both sales and inventory management.
Today, the sales are 100% controlled by into platform, but we still use this third party for inventory not for inventory and inventory management. So it's this third party that changed the software within their distribution center that impacted their ability to ship some of our.
Mostly in the first quarter with a little bit of carryover into the second quarter from what I understand this issue has been rectified and we should not see additional impact from the swap.
Softwood changeover buyout well logistics partner are.
Going on into the third or fourth quarter of 2022.
Okay.
Okay, Great and just.
It all kind of housekeeping the DKNY when that comes in in the third quarter is that going to be in the Europe or the U S Division.
DKNY is in the U S operations.
And we will be 90, we manufactured product all over the world for our U S operations, but all of the DKNY will be through U S. So all the profits.
We'll be 100% to the bottom line of inter Parfums, Inc. Are there won't be any minority interest share I guess.
Yourself.
Okay and is there any way to quantify how much the.
Ferragamo and on guard.
<unk> contributed in the quarter to sales it was at about 10 million or a little bit more than that.
Well you asked the same question at the end of at the end of Q at the end of Q1.
Let me just quickly see if I can.
So it's a little bit above.
You can check yes, yeah. It was it was closer to a year closer to 12 almost $13 million.
For three months.
Yeah, just for the three months.
Right. Okay. Thank you so much I'll pass it on thanks.
Thank you Linda.
Yeah.
Thank you. Your next question comes from Steph Wissink with Jefferies. Please go ahead.
Thank you good morning, everyone and Echo Linda's comments right, we're going to Miss you. Thank you for everything you've done for us.
I have a question for you on pricing I think you mentioned you've already taken a mid single digit pricing another possibly low to mid single digit price to come and share with us a little bit about the timing and what you're anticipating in terms of any change in demand if you've seen any change in demand.
And then is that pricing fully covering your cost based on your current cost structure and what it also cover your cost based on young what you mentioned in terms of relocating your infrastructure into the U S from China.
Yes.
So the first price increase has been in effect and Oh and everybody has accepted.
To integrate the two its a worldwide.
We told our all up customers, but they are going to see another price increase towards the end of it we don't know.
She's going to be between three to let's see 6% certain buckets.
Hum different to retail price of who's in office.
When they see that.
So many companies doing price increase so there, but there is no oh.
No I'm.
Resistance is another.
Some resistance than before.
So who we were checking I was checking yesterday the mall genes.
In the last 250 days for instance.
Because we.
The price increase that's been.
On a full for a while now and we see a nice impact positive impact and that will mountain. So I don't want to say that we absolutely need to.
A price increase at the end of the year, but I think that it was reasonable to give a long lead time to all our retailers and distributors.
So so there is no surprise.
As of now as of now I will.
So good he's a.
Very acceptable margin is acceptable, but again again because of lack of visibility.
We don't know and I prefer to.
<unk> announced a price increase coming at the end of a year if.
If we don't need it will delay.
Uh huh.
Hum.
We see the margins off maintain you receive it.
Oh, our suppliers.
Ah stay the.
The same with the same kind of pricing.
But we don't need to we will either but I think it was important to to give misinformation.
This information to our customers.
So unless you want to add something.
Yeah. The only thing I would I would add is you know clearly we've been able to absorb through this price increase are the incremental costs today, we're starting to see a little bit of oh of lowering and especially in the transportation side of the business. Our transportation cost is just starting to.
Come down a little bit. So we were kind of hopeful that that might continue but clearly we've been able to absorb.
All of the incremental inflationary pressures that we've seen with the price increase that was in that was instituted earlier in the year.
Okay very helpful and John one for you on your comments regarding the Renaissance of travel retail and I'm wondering if you have any data that you can share with respect to summer seasonal demand within travel retail.
Any sort of improve are difficult to quantify but feel that they can tell you is that we've seen a we've seen all those plenty plenty of all this from Oh did you feel creators.
In Europe in the U S and and.
And Oh DKNY.
Quite a good exposure with travel retail and who we were talking to all of them to be afraid to crack here of a tough carrying good.
Ken why and they give us some very optimistic.
[noise] projections are that's why I said at the beginning of my comments are we cannot change it too frequently yeah, well her guidance and some people are going to say Oh, but we've a five on the almost 500 million dollar in the first.
In the first six months.
Of course, if you're going to do.
The good news there going to be able to do those who wouldn't be and its not that obvious a lot of things could happen, but oh, we take each good news at the time and distance travel retail is going into the right direction, let's not forget that we have not seen although full oh, yes.
<unk> suites.
Its quite true fishing, and yeah, I'll say as I said, Oh box food.
That's almost two placebo too.
To book tickets or visa visa, a stronger activity and he's going to help for us, especially in the third and fourth quarter.
Helpful as always thank you.
Thank you.
Okay.
Thank you. Our next question comes from Hamed <unk> with B Ws financial Please go ahead.
Hi, Good luck, a rush on your retirement and congrats.
Uh huh.
I was just wanted to start off with the euro weakening against the dollar does that accelerate or make you rethink about your capital structure as far as the debt in euros and paying that off quickly or maybe even.
Getting more of your your euro base debt.
[noise] not you know the debt that we had but we have in our book was really to buy the headquarter well paying it to them, although our 10, yeah. It's we swept them.
We swept the rate to a fixed rate.
I think what being what one per Suntrust.
Yeah, there's a there's a maximum there's actually a maximum cap of 2% on this that the other debt that was swapped.
Oh.
It's like another close to 1%, which is very reasonable and I will leave the and it's a French company.
The debt and the income is in euro so I will leave the I wouldn't be so that's not new.
Okay.
Oh and then the other question was.
Are you seeing any changes in ordering habits at retailers in Europe and European region.
Just given the inflationary pressures there.
Not really not really yeah, we have not seen any negative impact.
Hum in terms of all those are coming from Europe are we saw some slowdown at certain retailers.
Coming from the U S.
We know that certain retailers have his inventory, but again.
It doesn't have an impact on our projections.
But when it comes to when it comes to fragrance I would say that.
They've all of inventory worldwide that ease of his for retailers is at a very acceptable level.
Okay and then my last question was going to be how are you planning on for 2023 releases.
And as the macro environment is having any impact as to what your schedule would look like.
Yeah. Thank you it's a good it's a great question.
We have a we have a lot of plans for 2023, even though there will be no blockbuster incidentally, we have each brand's he's gonna have oh.
The flank of in companion and honestly with the with the strength of the business.
We do not need.
To play all our calls in 2023.
We will keep some of our costs for 2020 for a well or are optimistic for 2023 them.
Again by your by spending the amount of advertising and promo and marketing, but we all are doing.
Close to 20%. So we're back to this kind of high level numbers. This is a a guarantee for our future says.
So were her coffee don't fall well very complete until 2023, that's why we delayed.
Some important launches because we don't think we need them.
Uh huh.
Yeah.
Okay. Thank you.
Okay.
Our next question comes from Linda Bolton Weiser with D. A Davidson. Please go ahead.
Yes, Hi, I just wanted to follow up in to gain a better understanding of that change from China to U S and Europe production can you just explain I I knew you were always getting components from China, but I was never aware that you were actually doing some filling in China yeah.
Yeah.
Yeah. So thank you for this question Yeah, we have been doing good.
Whereas when our wins the wins are when the U S put sanctions against China with Terry for 25% increase we decided to switch a lot of the production points of unless wheat production I went looking feel.
In China and.
In the last 18 months.
Almost 24 months, we were doing the feeling of unless in China.
Which is a which is something I've decided to change so unless we would not be feeding the mill in China will stop being Lisa without we were buying a lot of components in China, we would be buying much less components are from China.
We think it's a are we better off we've been through all of it too.
It's not at all so stay tuned.
Eight months against China, as the country, but I think that Oh, we have to source components closer to where the finished product is sold.
And Oh, we have seen falling since.
<unk> products are trucking component struggling all around the world.
From China, all of them to be transport chocolate, transforming Europe and come to the U S. And then shipped back to China, just totally insane.
Insane.
And it's a it's a decision that we use that we've made.
Ooh and Ah of.
Of course.
We were a little forced to do it when you look at too.
Cost of the transportation and also when you look at the at the the delays the delays and port delays in manufacturing delays in shipping.
It was almost impossible to forecast.
Production et cetera, So we feel the most secure by producing closer to where we sit.
Okay and can you tell us are you still shipping them some to Russia.
Hello problems for Russia, we do not cheaper we do not see any products from the U S. Those are very clear we have stopped shipping go day one.
And you'd call Ducks are from the ER with a made in USA AR, we did not we did not ship them to Russia. So we stopped.
The almost six months ago, we stopped all our business with Russia, but our subsidiary in France and in Italy.
Have a will follow a different type of of rules.
As long as a product suite that is far less than 300 euro or dollars that they have the right to ship. So so the French subsidiary and our Italian subsidiary.
Legally a sheep to workshop a of course the business is down because oh there is a.
And he's less demand that we say oh, but oh for us.
Is he made that a it's a loss of $20 million to $50 million.
The fact that we are shipping less from Europe and zero from the U S.
But again these numbers are already included.
Included in our guidance.
Yeah.
Thank you very much.
Thank you.
And there are no further questions at this time I'll hand, the floor back to management for closing remarks.
Thank you and thank you for tuning into our conference call I Hope some of you will be able to attend our annual meeting at 10, a M. On Friday September 9th at our headquarters in New York.
If you have any further questions. Please as usual contact me by email.
Well and stay safe. Thank you again.
Thank you everyone. Thank you for attending the conference.
Thank you and that concludes today's conference all parties may disconnect have a great day.