Q3 2022 Inter Parfums Inc Earnings Call
Ladies and gentlemen, thank you for standing by our conference will begin momentarily. Once again, thank you for standing by our conference will begin momentarily.
[music].
Greetings and welcome to the inter Parfums third quarter 2022 conference call and webcast. At this time all participants are in a listen only mode.
And answer session will follow with a formal presentation.
What you require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, I'd like to remind you that this conference is being recorded at this time I'd like to turn the call over to Vice President of the equity group and inter Parfums Investor Relations Representative Karen Daily.
Thank you Darryl on behalf of the company I would like to note that this conference call may contain forward looking statements statements, which involve known and unknown risks uncertainties and other factors that may cause actual results to be materially different from projected resolved. These.
These factors may be found in the company's filings with the Securities and Exchange Commission under the heading forward looking statements and risk factors in their most recent annual report on Form 10-K, and subsequent quarterly reports on Form 10-Q.
Forward looking statements speak only as of the date on which they are made and inter parfums undertakes no obligation to update or revise the information discussed.
It is now my pleasure to turn the call over to Mr. John <unk>, Chairman and Chief Executive Officer of Inter Parfums, Sean you may begin.
Thank you Karen and.
Good morning, everyone and thank you for participating in today's call.
Joining me will be Michelle Atwood, who became CFO on September six of two to three weeks before the close of the quarter.
As I mentioned on our last call Michelle came to us from Este Lauder, as Vice President Finance and strategy.
In the short time, he has been onboard and Michelle has been instrumental in exploring ways to make our company more efficient and productive and by driving scale and operational efficiencies across the company.
As well as thinking goes up the leadership of our finance functions.
So when you want you to.
Keep in mind that when we refer to our European based operation, we're talking about our 73% owned French subsidiary.
Uh-huh S a.
While I will U S based operations reset to our wholly owned domestic subsidiaries.
On both sides of the Atlantic our business is primarily prestige fragrances and related products.
Yeah.
In the 40 years.
But they've been in the business I don't recall, so many moving parts and forces outside of our control.
The dollar Euro exchange rate the war in use and you're still in Europe . The holdups in transportation in the supply chain. The original resell resilience in Covid and concurrent log downs and political turmoil shook up the world to name a few.
And despite these headwinds we have once again raised our guidance for 2022.
Based on our record level of October says and although backlog.
As we as we reported yesterday, we now look for net sales to come in at approximately one 1 billion I have to get used to it.
1.025 billion and diluted EPS of a treat.
The $43 and 40 340.
As our forecast indicates the holiday season is shaping up very well and we're looking forward to a strong fourth quarter.
Which we are again supporting with a massive advertising and promotional campaign to stimulate holiday season retail.
And set the stage for healthy retail all deals in the new year.
Moving onto our wealth business by region.
Since North America is our largest market I will devote some time to why year to date sales are up.
Only 4%.
If you recall last year, North American sales rose 140%.
The first nine months compared to one year old yeah as U S customers schedule most of their holiday shipments in the first quarter in anticipation of supply chain problems. While this year some of the gift sets shipments originally scheduled for delivery in the current shelf close to do you didn't get.
And the fourth quarter.
Thus far this year.
Oh, well, although my major markets have achieved a very healthy growth. Despite the strength of the dollar, though I will says and we're still in Europe rose, 34% and although our business in China is down due to lockdowns and travel restrictions our overall.
Sales in Asia up 23%.
Our sales in the Middle East and Central and South America were also robust of 41% from the Middle East a 28% for central and South America.
Saturday and you're still in Europe are understandably down, 16% as well not shipping products from the U S to Russia.
With the exception of China travel retail has made a strong comeback.
The century book.
International Air Transport Association stated that in July 2022.
Tell National Trust, he crosses 150% versus July 2021, which builds upon the upward trend since the start of the year.
Yeah.
Pre COVID-19, our travel retail business runs between 10 and 15% of net sales today I will say it is around 8%, we still have room to grow in 2023, and 2024, but with a major re queue recovery from the near cessation.
During the worst days of the pandemic, we spent the demand for vacation travel as well as the resumption of business travel.
Our European based brands achieved nearly 10% growth year to date in constant euro but in dollars. It was only 4%.
Looking at our two largest brands Montblanc nine months sales were up 19% ahead of last year in euro, but only 6% in dollars Jimmy Choo sales were up 23% in euro, but just 9% in dollars and coach says were up 17% in Europe .
Cool, but only 4% in dollars.
European brand says also got a nice boost from Montclair Weaver, the beauty of our first ever since.
Earlier in the year.
Although 2022, new product launches included mobile legend Red three coach Fragrances, Wild Rose and Dream Sunset for a month and a new pillar for men called open road.
We also launched Kate Spade Sparkles, Jimmy Choo men are cool and I wont shoe for US a lot of one o'clock and bushel sangria.
Plus V, where many many extensions and flankers for all of our brands.
Staying with European operations, we are thrilled about the new model for our largest run more blown.
Because they didn't see that.
The new face of phone block is widely regarded as the best football player or a similar view cool socal.
And.
He was one of the most accomplished coaches in the Socal does he done is already appearing in our Montblanc legend promotional campaign.
Moving onto U S based operations.
Yes, our largest brand within the group and our fourth largest brand overall.
<unk> year to date sales growth of 24%.
The launch of four more this year and the continued success of the Bella Vita fragrance pillar.
So much of that growth.
Yeah.
Of course, the addition of new brands, namely C. I got more ungaro Donut Callahan and DKNY was responsible for much of a 62% year to date topline growth.
Although the two letter brands didn't kick in until late July .
Many of our well mid size brands have also been strong the form S. Nine months satisfying since far best can be a 32% or at least a 27% Oscar de la Renta, 24%.
Yeah.
The integration of the doughnut Callahan and you can why.
As been smooth. Despite some may just supply chain Bleaches, we started by servicing U S Department stores and we are in the middle of replenishing inventory in Europe and in South America.
The new <unk> will take over responsibility for production from the former licensee and a new pillar is already in the works for a launch in 2024.
It is just although yeah since we signed the sale I got more license agreement our office in Florence, Italy operates a fear I got more fragrance business with management, our growing sales team and production conducted in Italy.
The timing of our agreement could not have been better though with the recent appointment of fashion. She pissed off Maximilian Davis as Phil I got most creative director.
Davis has been re energizing Shira gambles appeal.
Kim Jong Gil deeply engaged digitally savvy and value driven customer, which has helped drive that Phil I got more fashion business.
23% in the first half of last year.
That bodes well for both liggett's, he sent and Voss and they'll development, including an entirely new collection debuting in 2024.
This year I got more trajectory is upward and it is well on its way to becoming one of the top brands in our portfolio.
Yeah.
For 2023, once again, we have new product launches in the pipeline.
For European operations, there will be a new fragrance for Kate Spade and full U S operation a new pillar for MCM, but for most of you all of this while building on the foundations of existing collections with extension and commercial innovation.
Yeah.
Just as a real growth is not exclusively dependent on new product launches. It is also not dependent on adding new brands. These being said as most of you know it is an ongoing push suite, we have two types of target.
Both brands with established businesses and fragrance offense for Aspira channel brands with great potential.
Today's most pressing problems, China, Russia inflation and supply chain may resist but invariably new challenges will emerge.
While we know that there are still some headwinds beyond our control. We believe we have robust plans and strong momentum.
Thanks to our diverse portfolio of brands and the proven resilience of our organization to overcome adversity.
While some of these headwinds have burwell to slow us down in the short term they will not stop us.
This is why we have taken on more space at our New York City headquarters and a well established.
In Florence and in Paris.
To support our growing U S based operations.
Our new Jersey distribution warehouse is undergoing refurbishment and overtime additional space maybe called for.
As I mentioned on our last call the new ERP implementation is nearing the finish line and it will help support our next stage of growth.
Now I will turn the call over to Michelle for a more detailed financial review.
Michelle.
Yeah. Thank you John and good morning, everyone.
I'm delighted to be on today's conference call. My first that ended up our film.
With two months under my belt I'm more convinced than ever that I made I made the right career in both.
It is a great organization under the leadership of Phil he'd been Shah with amazingly talented and dedicated people at all levels and in all locations.
In addition to my finance M&A and strategy responsibilities I have been given carte Blanche to drive scale across the entire company with the ultimate goal of establishing the building blocks and framework to support our next billion in sales.
Moving on to our financial results.
Foreign currency exchange rates continue to have a significant impact on the third quarter and year to date performance.
The U S dollar relative to the euro hasn't been as strong for 20 years now as you know by now a strong U S. Dollar has a negative impact on our sales.
In fact, the average dollar euro exchange rate depressed sales by 5% for the third quarter and nine months period.
On the flip side, a strong dollar and boost gross margins because almost 50% of net sales of our European operations are denominated in U S dollars.
While almost all of its costs are incurred in Europe .
As we reported last month third quarter sales rose, 7% to a record 280 million from 263 million in the third quarter of 2021.
At comparable foreign exchange rates third quarter net sales increased 12%.
It bears repeating that our 2021 third quarter net sales were 64% ahead of 2023rd quarter, making for a difficult comparison.
Year to date sales rose, 16% to $776 million from $669 million in the prior year.
For our European based operations third quarter gross margin was 69, 5% compared to $66 six one year earlier with the nearly 300 basis point increase attributable to the strong U S dollar favorable mix and our pricing actions offset somewhat by increased transportation.
Our borrowing costs.
Our U S operations third quarter gross margin Rose 70, 70 basis points to 53, 8% from 53.1 with the improvement due to scale benefits pricing actions as well as favorable brand mix.
Thanks.
On a consolidated basis third quarter gross margin rose to 64, 9% from 63% 63, 7% in the prior period.
Moving on to SG&A expense, you may recall that last year, our sales far exceeded expectations in every quarter and so we understand on advertising and promotion throughout 'twenty 'twenty do you want.
This year, we are back to more normalized spending leading to an increase in SG&A.
Consolidated basis N P represented 16% and 16, 1% of net sales for the 2022 three and nine month periods compared to $15 three in 2014 point to for the respective periods last year.
For European operations, SG&A expenses increased to 42, 1% and 42, 3% of net sales for the current three and nine month periods respectively.
Compared to $38 eight and $39 nine for the same periods when your earlier.
For U S operations SG&A expenses were 41, 4% and 42% of net sales for the third and nine month periods.
As compared to 35.1 and $36 eight in the prior year.
In addition to more normalized E&P spending for <unk>.
U S operations the increase in SG&A also reflects the increased investments, we are making in staffing organization and infrastructure to support our new brands.
Based upon our 1.025 billion of sales guidance for 2022, you can expect another $90 million of A&P expenditures to meet our annual target of 21% of net sales.
Once again in the fourth quarter is when we activate the big A&P spending to drive holiday sales and keep them on some going in the first quarter of the following year.
Our 2021 third quarter operating margin was 25, 7%, which is quite impressive. This year. It was a 23% still exceptional but probably not sustainable if we really want to have a long term plan to grow our business.
By way of comparison in the third quarter of 2019 and in 2018, the operating margin was 19, 2% and 19, 7% respectively.
Over the long term the high teens or probably the sweet spot, we will be aiming for.
Below the operating line there were several north worthy items first interest and investment income for the current third quarter includes a $2 3 million gain as compared to last year's loss of a 100000, resulting from the interest rate swap on our real estate loan in Paris.
For the current nine month period, we recognized a gain of $6 4 million related to this interest rate swap, which was largely upset by an unusual one time loss of $5 3 million on marketable equity securities during the same period.
Moving on to taxes, our consolidated effective tax rate was 23% for the first nine months ended September 32022.
As compared to 28% last year over the same period.
In 2021 we settled the claim by the French tax authorities with a payment of approximately $3 million relating to a subsidiary also the French corporate income tax rate dropped from 28% to 25%. Our U S operations tax rate was also lower as we recognized a onetime tax benefit of $2 5 million associates.
The 2021 ferragamo acquisition.
At the time of the acquisition, we had not recognized deferred tax benefits and there were uncertainties concerning their potential recoverability. However, as of September 30th this year. The Recoverability is seems likely.
Our balance sheet remains very strong we closed the third quarter with working capital of 469 million, including approximately 177 million in cash cash equivalents and short term investments and working capital ratio of two nine to one the $108 million of long term debt relates primarily to the acquisition of <unk>.
The new headquarters a bench of profound effect.
Although the accounts receivable is up 56% from year end 2021 is driven by our record sales combined with our high level of shipments towards the end of the third quarter as well as some extended payment schedules well days outstanding increased to 80 days up from 70 days in the corresponding period of the prior year.
We're still experiencing strong collection activity and do not foresee any problems with collections.
Inventory levels at end September 2022 increased 55% from year end 2021 what it had been toys were less than optimal for the size of the business, we aspire to be.
We have no qualms about carrying high levels of inventory in an environment, where shortages of bound and transportation could be unreliable and our experience it is better than carrying more inventory than lose the sale of goods.
As you know our inventories doesn't go stale color size your season protecting us from any risk of obsolescence. So many.
Are there any potential risk on sales, we will continue to maintain over sufficiency, our inventory of components and finished goods.
So we feel the current supply chain disruptions are behind us.
With respect to our customers' inventory the U S and European retailers did not have the excess inventory.
And sell out is actually quite strong by contrast inventory levels in China and elevated.
Well it makes sense and sales are down in business in general is stagnant due to lockdowns.
Now operator, please open the lines for questions.
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Okay.
Yeah.
Our first questions come from the line of Linda Bolton Weiser with D. A Davidson. Please proceed with your question.
Yeah.
Yes, Hello, and congratulations on a good quarter.
Thank you. So just just one little housekeeping item it looks to me like the special other two special items were about 14 cents per share. So is it true that you roughly raise the guidance by that amount is that the way to think about it.
Yeah, that's that's really the right way to look at it yes.
Okay and then.
So it's nice to see you know the rebound.
Like when I look at it as organic sales growth in the fourth quarter. It looks like it's gonna be a nicely double digit number or something that's really excellent.
Is there any way to quantify the impact on sales of the <unk>.
Component shortages in the quarter like how much higher sales pulled there has been if you hadn't had those problems.
Yeah. So so Linda we Oh I think if you backed out the numbers appropriately our guidance assumes about 18% growth in quarter four which.
Which is a which is pretty close to what we did a year to date at 16%.
Obviously, there's six points of FX headwind and sell it on an all in basis, we're actually on our organic basis, we're looking for 24% of growth.
We had about $10 million of sales that we we shifted in Q4, which we probably should have had in Q3.
So that's going to represent about 5% of growth.
Yeah.
Okay. Thank you that's helpful. And then I mean, how do you get a lot of talking on their call as well about the component shortages. So it's definitely up.
A significant industry problem, what's the status of that now I mean, it hasn't improved but it sounds like it's better because you're you're being able to ship more sales, but can you just give a little more color on exactly what the what the issues are with those components.
I can try and so.
It's true that we have moved some some sales from third quarter to fourth quarter, but still I still think that we have missed because of the component shortage. We have missed some sales some real deals, but we can just cannot ship how about this situation I think it continues to be bad.
It was terrible in the film.
I wouldn't say it was six seven months, but we have taken some actions.
To to play small this to anticipate a also.
A bit too.
Components.
And we have also decided to.
To to diversify our sources of supply so as we have taken B section. If I tell you we are seeing some of the positive impact.
The impact to now but.
I don't see the situation improved special young glass.
And especially on the pumps.
And as you know is that if we don't have lesser I cannot we cannot ship the product.
So so that's number one on the top of that to make things even the west.
We had some major of a price increase on the glass because less use a lot of energy to make glass you.
You use a lot of energy and the pricing.
Is increasing.
Sure sure.
So against that we have decided to to do another price increase in beginning of January .
And so all our customers Oh, no, but we will have.
Price increase in January .
Yeah.
Is it okay. So yes, absolutely. Thank you.
And just.
Just a final question for me if I could.
You talked about the strength in fragrances. So the demand is so strong and Cody reaffirm that as well.
So you said, maybe no big launches in 2023, I'm curious about on A&P spending does the same theory apply in other words why do you need to spend all of that on a M. P. Maybe in 'twenty two 'twenty three when demand is so robust anyways. What are you what are your thoughts on that.
Uh huh.
I'm going to try to answer that but I think that the spending of E&P is very important to assure him to ensure a a syndrome.
Especially in visa critical moment the business is good for almost everybody, but it doesn't mean that we have to stop who's spending.
And if its way, we'll continue to spend at a level of Michel mentioned around 20%, 18%, 20% something like that.
It's quite too high but we think this is theory, we still think that there is a strong demand for for fragrance in general for our brands in particular, I think that we're still able to increase market share in new and increasing <unk>.
Hum.
In an industry that is increasing at a fast pace for fragrance Sue will continue even though the market is strong we will want to continue to invest in advertising Michelle would you want to try to Oh.
Oh, Yes, I would also just add that I mean, even if demand is strong I mean at the end of the day, it's a very competitive environment right and we need to make sure that our brands are top of mind.
And that we're driving the right level of awareness of the <unk>.
Right level of trial with our sampling programs. So so at the end of the day.
It's also about maintaining the right level of share of voice to be competitive in this industry.
Sorry.
<unk>.
Okay.
Okay. Thank you so much.
Thank you. Thank you very much though.
Thank you. Our next question will come from the line of Kara Anderson with Jefferies. Please proceed with your questions.
Hey, guys How's it going it's Curt on for actually congrats on the great quarter.
Hi, Kurt.
So just first question here you guys are thinking about 2023 and a recovery of <unk>.
Travel retail and China. How are you guys planning the business around are you repatriated demand from China to other markets is.
Travel retail kind of resumes outbound from China and.
What do you kind of envision being remaining domesticated thus far as a one stop retail opens up in the region.
Sure.
Yeah. So I mean, essentially it's as you've seen yeah, well all the while the China business has been it's been slow our overall Asia Pacific business is up 23%. So we have made sure that we're investing heavily.
And in the domestic markets, even though we probably lost some sales related to China, and the China and the Chinese traveling consumers. So we have been monitoring inventory levels very closely particularly in China, and we have been working in partnership with our with our distributors there.
So I think that kind of covers off the piece on on how we're dealing with China are currently the other thing is we're obviously monitoring very closely how the markets reopen and we are we're obviously ready with our distributors to to reinvest in China, and and and put the business back on the growth trajectory as you know China has been growing.
Quite significantly the fragrance business has been growing quite a lot in the last couple of years and we believe that there's a huge potential in the China market will continue to invest there, but obviously at this point in time, it doesn't really make a lot of sense to do that but where we're managing we're monitoring this very closely.
Got it thanks.
If I may if I may add I would like to say that you know where our projections for 2023, and we will release. Some are I think a couple of weeks of Michelle.
We are well not called we are not counting on the on the business on a strong business in China at least at least for the.
First and second quarter of 2023, so we're gonna be a very conservative you know well numbers regarding China, we do not think that the situation will improve.
Before.
[noise] before maybe the first three quarters of less to them. So we take a very conservative approach Ah. It's okay. We are as long as it's you know it would be not well known bill.
He likes it.
But we have the good news is that we have overall markets, but continue with that continuing to grow and that's where we'll find the growth.
Growth for next year.
Got it. Thanks, you just answered one of my half of my follow up question. So is it prudent to plan a recovery of the travel retail business is kind of along the same timeline.
You're thinking about the Chinese business.
Yeah.
Yeah Yeah.
Yeah, I would say I would say, yes, I mean, you know probably the travel retail business, we expect it will pick up more rapidly.
Cause I think once they once they reopen there's probably a lot of pent up travel I think if we just look at what's happened.
And you know in Europe and in the U S.
Reopening has triggered quite a lot of travel so you know that might pick up a little bit faster.
Got it Okay and then just one more for me looking at the A&P spend in Q2 and just the actions that have been taken with was done it seems that on kind of being the frontman for I believe you said it was unclear I'm sorry, My blog, how are you guys looking at.
Two kind of parlay the World Cup with the holiday season, you know you guys aren't the first to South a football are ahead of ahead of a big tournament I think your just replace Johnny Depp last year with Gilead and buffet and then Hugo boss also activated a number of football or is that a pretty routine.
As World Cup, just kind of wondering how you guys are looking to leverage that offense.
Mobile kind of stimulus that it's it's going up demand.
Yeah, So it's a very.
Good point, we think that the the soccer players and all the activities around the football or soccer.
Especially around the World Cup ease of use at an interesting point of communication for our brands.
I just came back from a visit in the Middle East because we have we are just starting to.
A draft EIS are strongly we've.
Is done online.
And we are we will have during the World Cup in Qatar in a in the give me rates in Dubai and Abu Dhabi.
With people are going to travel a lot we're going to have a a lot of I will billboards in advertising. So we think it's a it's a good medium. It's a good it's a very positive.
Hum.
That's an OTT. So we think that it will help to fasciola from loblaw.
Yeah.
Great and what are your what are your thoughts on France has a chance to to repeat as World Cup champion.
I wish I wish, but but I think that the competition is fierce.
Uh huh.
Yeah.
When you look at the absolute.
Thanks, a lot for the time and.
Very much.
Thank you.
Yeah.
Thank you our next questions come from the lineup on that of course there.