Q1 2023 Inter Parfums Inc Earnings Call
Greetings and welcome to the inter Parfums first quarter 2023 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 anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded at this time I'd like to turn the call over to Vice President of the equity group of Inter Parfums Investor Relations Representative Karen Daily.
Thank you Darryl.
For the company I would like to note that 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 resolve.
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 our most recent annual report on Form 10-K.
These statements speak only as of the date on which they are made and enter Parsons undertakes no obligation to update the information discussed.
It's now my pleasure to turn the call over to John The Darice, Chairman and Chief Executive Officer of interplay sounds John you may begin.
Thank you Karen and good morning, everyone and welcome to our first quarter conference call.
As in the RASK I would stop the discussion.
And then Michel Atwood.
CFO will review, our financial performance outlook and related issues.
So and you want you to answer the phone keep in mind that when that when we refer to our European based operations, we are talking about 72%.
One subsidiary called desktop SC.
And when we refer to are a U S based operations.
Talking about our wholly owned domestic subsidiaries.
So 2023 already has the hallmarks of another spectacular year for our company.
We admit that some of the exuberant is because of the strengths the fragrance market.
We also believe that our stellar performance is driven by the high quality operation.
But our talented stuff every day and their ability to execute system the bull innovation.
This confluence resumed.
Best quarterly sales.
What's the story.
Let's move on to our business by region.
North America, our largest market niche.
Net sales increased by 56%.
You may recall that in last year's first quarter.
The change in the logistics software of our logistic operate one of our logistic operate to some filled 2022 first quarter sense, but that resolved as we completed the year of 22% in North America last year.
Western Europe , and Asia Pacific also had a strong start to the year, we've says had 21% and 8% respectively.
Our business in Central and South America is really gaining traction.
Sales rose, 43%, while you're still in Europe , and the middle Eastern group.
By 25% and 5% respectively.
Our business in the duty free sector is steadily improving and we expect to see continued momentum as the year progresses.
The dollar has weakened somewhat in 2023, but the foreign exchange impact continues to provide civil liability under our European based operations, which grew sales in U S dollars by 26% or 29% in constant currency.
An interesting point about the well European based operation is the Jimmy Choo brand sales exceeded those of Moblog historically, our largest brands.
Both brands performed exceedingly well with net sales growth of 63% for Jimmy Choo, 28% Formula.
I will sell vouchers run coach also had a great start to the year, we sell up 24%.
During this first quarter, we introduced a new more clear collection.
We introduced onshore flanker for Jimmy Choo called rule session.
We had also a new innovation for Kate Spade called Sherry.
The whole chefs launched T tonsillectomy and.
And we had another son of a colleague strikes called the NAV by Van Cleef interface.
In the second quarter, we will be launching coach green.
Mobile explorer platinum.
<unk> Gill at life and in the first quarter.
We've got good Slough, and new entries from our colleague a failed and van Cleef collection.
For the remainder of 2023 the base of our product launches is expected to slow what geographic rollout of products with debuted late in 2022 early 'twenty three are expected to continue.
And now we're a U S based operations, which achieved first quarter sales growth of 19% on top of the tremendous growth of 77% during the fiscal 2022.
As we reported the smallest guess fragrance sales approximate those of last year first quarter.
<unk> sales were 36% ahead of its failure failures of.
Additionally, while issues.
The implementation held back overall said it impacted guess disproportionate.
We have received since substantial orders shipping in the second quarter and new guests products, including we're more a co-op Bella biodiesel and the gifts for originals trio and really the second third and fourth quarters, respectively.
The sculpture product launches for U S based operations with primarily primarily focused on brand extension for Exxon. For example, we launched authentic self Abercrombie Kenyan Skyfall is still highly by four Scotland Sutton senior in algebra Russell Ferragamo.
For the balance of the year, we have an extensive innovation program until the widely recognized DKNY and Donna Karan brands.
As we said on our year end conference call. The combination of Donna Karan and DKNY franchises is destined to be our second largest brand within our U S based operation.
We also have brand extension for MCM in the suite and guests as well as a vessel that I've got more on the back of <unk> plus a brand new major launch of an untitled entirely new lines for Hollister.
Yesterday evening in conjunction with our earnings release, we announced our agreement with Abercrombie to distribute its number one men's fragrance called shifts in selective markets.
The first phase of the agreement, which becomes effective on September one 2023.
This fifth distribution in certain major markets.
The second phase, which activates in February 2024 covers distribution in additional regions and May include other flankers of the fifth familiar of products.
Our relationship with Abercrombie began in 2014, and we have brought to market several major blockbuster pillars, including 15, zinc Oh wait and authentic.
We have close to a decade under our belt, we have earned about <unk> and Fitch Coffey does as if you don't babies agreement Untrusting us to distribute the iconic <unk> collection on a test basis for three years.
Our plans call for growing penetration in existing shifts market that includes department stores specialty stores and duty free stores as well as online sales, while exploring opportunities in untapped markets.
Yeah.
Moving onto a notable topic across our industry our sales in China in the first quarter, where as expected underwhelming.
About three weeks ago I traveled to several cities in China visiting stores distributors and stuff.
Following the lift of Lockdowns, we continue to see business is improving.
But at a slower pace than people expected.
The one exception is with UT free market of Hainan, which I visited also where business is booming chine.
Chinese consumers are pulling in and they'll buying beauty products.
It is not a secret that the unfairly ease and has historically been on skincare, but fragrance is growing faster.
From what I could see our unless we M. C. M. Van Cleef, an offence products are doing very well, there and we suspect that fragrance product as a whole will become more and more relevant.
The fragrance opportunity in China.
He still very big however, the timing of the real breakout is much less system that said the business is moving in the right direction.
The younger generation of Chinese consumers are living through changing cultural customs and they'll not only training, but loving fragrances, most so prestige and mass.
We're looking to express themselves, who fragrance fashion and accessories, we're seeing a preference into more exclusive niche fragrances at a higher retail costs.
In an effort to address the demand we are customizing our merchandising for example, with golf and van Cleef storefront expansion in China in the next year, we will tailor our efforts to take advantage of the expected growth in brand relevance really even.
As always we will share additional information on future calls as we gain visibility on China.
The other notable tawfeeq ease supply chain.
To sum it up is better but far from ideal.
Pumps and glass components remain in short supply and.
And how do we have saved for nearly two years were soft synced in multiple locations.
During more and sell there in advance of our expected needs.
As good as the first quarter was inventory shortfalls only permitted us to ship about 80% of all those four European based operation and 70% of orders for our U S based operation.
One other question that keeps coming up is why well not to swing when you will artisanal fragrance brands.
The N series, probably for the same reason, we steer clear of this of the celebrity fragrance obsession. It is just not all our lane, we really know and lagged the prestige fragrance business, which accounts for more most frequent and said.
And I think it is fair to say, we like it even more these days with some of our peers peeling off fragrance brands that have decades of brand equity with multiple touch points in apparel and accessories.
In a recent article in one of the beauty trade magazine Macy's VP of fragrance noted that our positions gives us agility in product innovation and that adds driven marketing tactics at.
Additionally, she mentioned our focus on storytelling and then your mission.
Which we continue to believe is one of our competitive advantages in the industry.
We remain true to our stated goal of always seeking out new licenses or other types of agreements, but expand our fragrance portfolio.
Before turning the call over to Michelle I would like to mention that we are moving up the ranks in the beauty industry. According to women's wear daily in 2022 beauty top 100 article we ranked number 33 up from 40.
One year earlier as a pure play fragrance manufacturer up against larger comprehensive breadth of additional beauty segments, such as cosmetics skincare I'll have Gail we're very pleased and very <unk>. So now we'll turn it over to Michelle to review our financial performance Michelle.
Thank you Sean.
Morning, everyone.
We issued our consolidated earnings release, and 10-Q filing yesterday evening.
I encourage you to review them on our company website.
While they're providing materials and there's always remarks covered a lot of ground with respect to our first quarter results. There are few points I believe are notable.
First we say this pretty much every time over 50% of our net sales in our European based operations are denominated in U S dollars, while almost all of its costs are incurred in Europe , a strong dollar depresses our sales in dollars, but boosts our gross margin.
In the first quarter of 2023, the sizeable gap in the Euro dollar versus the prior year period has narrowed from 112 to 107.
And there was only a negative 2% foreign exchange impact on the first quarter sales by comparison in the final quarter of 2020, Q. There was a negative 10% foreign exchange impact versus the prior years fourth quarter with the Euro dollar and going from 114 to one or two so that's normalizing.
We're starting to see pretty much some of these.
Strange FX impacts.
Less of an impact.
Hope to see that going forward.
Now moving on to gross margins overall, we expanded gross margins by 180 basis points.
The biggest driver of this expansion has been pricing as many of you know we took a price increase at the beginning of the year. However, this increase was only marginally countered by higher cost of goods because of the age of associated inventory FIFO accounting.
We expect this benefit to partially things out in quarter, two but mostly in the back half of the year.
For European based operations, the convergence of pricing options and growing sales in the U S, where we control distribution and book wholesaler versus ex factory prices resulted in a 100 basis point improvement in gross margin.
For U S based operations gross profit margin improved by 370 basis points with pricing accounting for more than half of the improvement while we expect the inflation on cost of goods to kick in later in the year.
We have been continuously working on maximizing our portfolio to a favorable product and channel mix with better pricing and to generate a long term competitive advantage. Another sustainable driver of gross margin input is building scale, which enables us to absorb fixed costs better.
Turning now to first quarter SG&A.
Overall, SG&A expenses increased 16% significantly lower than our sales growth of 24%.
<unk>, a sales perspective, SG&A improved by 270 basis points from the prior period to 36, 1%.
For European based operations SG&A expenses increased 12%, representing 33, 6% of net sales compared to 30 791 year earlier.
Our U S based operations SG&A expenses increased 24% represented 43, 4% of net sales compared to 41, 5% in the same period last year.
For both European and U S based operations increased spending on promotion and advertising.
The primary drivers of the increase specifically for U S based operations.
Also made additional talent and infrastructure investments to support both new licenses and the growth of established perhaps this was something we already touched on at the end of <unk>.
<unk> last quarterly call.
This represents an increase of approximately $4 million of additional expenses to SG&A compared to the first quarter of 2022.
With a 24% increase in the first quarter net sales our promotion and advertising expenses only increased 3% and comprised of 11, 3% of net sales versus 13, 6% in last year's first quarter.
It's worth noting that our pre pandemic first quarter of 2019 promotion and advertising expense was 15, 4% of that.
Sales in 2002.
2019.
If we had a crystal ball, we would've had significantly higher spend on promotion and advertising, but as many industry experts have sure Craig visibility remains unpredictable and we continue to see market growth upside.
You've heard us say before our goal is to spend 21% of net sales our promotion and advertising on an annualized basis with.
But the fourth quarter, historically reported the largest expense quarter of the year.
Other income and expense added $2 $3 billion or about <unk> per share to the bottom line.
Interest and investment income net of interest expense added about 3 million other income compared to a loss of $2 4 million in the prior year period.
However, we went from recognizing a gain of $2 2 million of foreign currency in the first year and the prior year's first quarter to velocity.
In the current first quarter.
Net income attributable to Noncontrolling interest rose 52 percentage point nearly $6 million in the quarter, which was primarily driven by the rapid growth and increased profitability, our European based operations in which we only own 72%.
Finally, our effective income tax rate was 23% in the current quarter down 100 basis points when compared to last year's first quarter.
As mentioned in the earnings release, we closed the first quarter with working capital of $489 million, including about $238 million in cash and cash equivalents and short term investments, bringing our working capital ratio of two to four to one.
Our long term debt totaled 145 million at March 31, primarily due to the enterprise pharmacy headquarter acquisition, which was financed by a 10 year $130 million loan at an effective fixed rate of about one 1%.
I'd like to share a few remaining points, while our working capital requirements continue to increase that continued to remain below our sales growth accounts receivables were up 22% from December 31, 2022, we're getting paid faster.
I think at 69 days for 75 days in last year's first quarter.
From a cash flow perspective inventory levels increased 7% from December 31.
But that's also in line with our sales growth.
As previously mentioned that we are continuing to experience Mark Johnson Pickering certain components, but we continue to believe we have relatively healthy stock of inventory and we will continue to have the strategy until our inventory until our supply chain.
It starts to get a little bit more normalized.
As you saw when we published our sales we have raised our full year 2023 guidance.
Since November of 2022. This is our second one on the last conference call I stated that the growth rate, we envision for net sales should exceed that of earnings and this is primarily attributable both to our commitment to the 21% of net sales investing in promotion and advertising.
Our forecast remains conservative we continue to anticipate sales growth to outpace earnings growth for the full year, hence our guidance of 15% top line and 12% EPS I believe stems from the expectancy of a slow down on foreign exchange favorability diminishing the gross margin television we experienced last year. Additionally.
Our price increases are expected to be offset by our higher cost. So as previously mentioned, we are committed to spending 21% of net sales on promotion and advertising for the year.
Finally, turning to share repurchases in the first quarter of 2023, we initiated a small share repurchase program over the course of the first quarter of 2023, we repurchased 43000 shares at a cost of $5 $6 million. These shares are classified as treasury shares on our balance sheet. The company continues to.
The plot to repurchase shares throughout 2023.
Before moving on to your questions I'd like to mention that I will be participating in two investor conferences next month.
Hi, Rez, 20th annual consumer growth and E Commerce Virtual conference on June 13th and 14th and the Jefferies Conference Consumer Conference live in Nantucket on June 20th of twenty-first I look forward to seeing interested parties there.
With that operator, please open the line for questions.
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Please probably poll for your questions.
Our first questions come from the line of Linda Bolton Weiser with D. A Davidson. Please proceed with your questions.
Yes, hi, congratulations on such a strong quarter.
So you know it's interesting to hear about your expanded relationship with Abercrombie I'm, a little curious why the adding of the distribution of the fears brand.
And to your EPS for the year, so you're earning so do you expect that to be accretive to earnings when you. When you start doing that later in the year.
I don't know did I say, but it will not.
The acquisitive to accretive to earnings and she said that too.
No its a mistake, yes. It does he was gonna make we can be.
This business of.
50, <unk> be a very profitable business.
Yeah. So so then does you know we did take our guidance up for the Wii.
We were ready to announce this partnership.
We know already a few weeks ago, we were just kind of tight.
Tightening up the communication. So yeah. So this is definitely built into our guidance at this point in time and yes. It is accretive.
Sure.
Our business.
Okay, Great and then yeah.
With regard to high na and it's all your comments were very interesting Este Lauder said that they stopped that there was some shifting of interests consumer interest toward other luxury goods like her handbags and things like that did you sense that at all and what is your exposure in high now do you like.
You sell a lot in Hainan and are there particular brands that you have that are strong there.
So I'm not going I mean difficult for me to comment on the on the.
Comments of Este, Lauder, which is a completely in respect of alerts.
What they saw in the Hainan is a is a huge huge shopping malls of pool of people buying that stood at a new fragrance cosmetic but too soon.
Lytham foods.
Clothing et cetera.
What they are but you remember.
We sit at the end of last year, but we're going to have to be very prudent on.
On the opening of China, because we think that's going to take.
It'll be more time than what people think and rightfully. So I think that there was a lot of inventory.
There is a lot of people body. So it's a good sign.
Not as much as what people can see that Oh jeez, there's no problems in Hainan Island yesterday Tuesday.
They are going to build even more.
Sitting space.
So I don't see a midterm long term I don't see any problems. It's just a timing, it's just a timing thing but.
But are we.
We think that our second quarter will be better felt cool too when you improve but for me it just slowed your suits.
Slow wilbon than expected.
Is it how is that business I think our business is not big enough no duty fleet could be a big deal.
I'm in Singapore, right now took longer to confront soon.
On the travel retail in that mid single so lot of a great deal so far from the retail the good news is that our Hayden is capturing a lot to lot of trouble.
Travel retail of Chinese, which we are travelling before in Korea. So the business in Korea is affected.
<unk> the business in China.
Boosie T effectors.
Overall I'm quite optimistic.
Okay sounds good thanks, I'll pass it on.
Thank you Linda.
Thank you. Our next question comes from the line of actually how games with Jefferies. Please proceed with your questions.
Hi, This is sidney on for Ashley.
A couple from us. So first one you know just again kind of on the comment we've heard from some competitors on the inventory situation in China and travel retail you know any further color you can kind of get from what you're seeing from Europe Vantage point, there and then the second question was just.
And have you seen any shift in French.
Brent towards maybe smaller form factor is kind of the mini our roller ball size of fragrances as consumers, maybe trade down or just on more skus.
Thank you.
You went to <unk>.
The figures for companies with Alpha.
Developed in the travel retail.
Which is great too.
And we still don't know yet of course the.
The recovery is not too fast enough, but for us. Unfortunately, several retail uses.
He's a two rig today at 5%.
<unk> two <unk> to 278%, so we still have room and again, because we're doing some that waiver.
Okay goods.
We took that into.
Two adult and E series of firsts of improvement.
Of course.
Revise review I will numbers.
Batesville the wholesale stop three I'll do the second part of your question I do not see at all.
The trend on the smaller size or less expensive products at the contrary I see a premium premium position.
And amongst your television.
Hum of products I see people buying a more expensive for the larger sizes more concentrated.
<unk>.
And this is a trend not only in.
In Asia, but also in the U S and Europe .
Yeah.
That's what they can see from them.
Thank you.
Yeah.
Thank you. Our next question comes from the line of chlorine Wolf Meyer with Piper Sandler. Please proceed with your questions.
Hey, good morning, and congrats on the accordion. Thanks for taking the questions. So first I would like to.
Just kind of dive into the updated guidance for the year I mean, it seems like you raised by about to be maybe slightly a little bit more.
But I do know you know so that's we're hoping for maybe a little bit more improvement.
Yes number can you just talk about you know maybe why we're not seeing as much growth there.
We are seeing pattern, you know higher investments in marketing and some pressures on the gross margin line, but anything beyond that to call out as you know, while we might maybe won't have as much upside in that bottom line earnings number.
Yes, maybe I'll take that Joe.
So yeah.
Yeah, So I mean really isn't it.
But I mean, if you look at if you look at the building blocks.
Gross margin expansion that we've seen.
Over the last few quarters has been in large part driven by pricing has also been driven by by foreign exchange, we're starting to see that trend kind of moving up slightly opposite direction.
And as I explained also in the prepared remarks, what we're seeing very clearly as well as you know we used to follow accounting. So first in first out a lot of the stuff that we're selling right now because we have so.
Close to nine months of inventory.
Bob.
Last year, so as we now start to see so we're seeing the sales uplift coming from higher pricing just hasn't it.
The fact, but the cards are really necessarily makes it their way.
So we do expect.
Gross margins to start being more impacted in the back half of the year.
I already see.
Perfect.
Quarter, two so that's really the big.
The Big Block and then the second one is really the A&P.
We've said this a couple of times.
I'd like to applaud you on financial planning.
Oh.
Our spending based on a certain assumption in terms of market growth.
Do you see upside.
The good news is everybody.
She's an upside surprise not just us.
Don't feel we're being uncompetitive in the mall.
Market.
But you know.
But it is something that we need to be closely watching for and.
And we are.
We're looking to to get to that 21% and margins. So so.
I'd say those are the two real main building.
Why youre seeing more prudent UBS.
For the balance of the year.
I mean, it's still a pretty nice number.
Looking at 15% topline, 12% EPS.
I think to be able to shave about.
Especially in the current context.
Yeah, that's fair enough. That's Super helpful. And then can you just touch a little bit more on the increased marketing spend.
Yeah, you know what what does that look like what kind of initiatives.
And then as we think about kind of like the ROI on these investments what kind of return are you baking into your internal expectation with this increased marketing spend.
John wanted to take the question on the marketing expense.
Oh.
But for me the marketing.
You mentioned the couple of times that you want this to be at 221% right on the on an average for the year I'm sure.
Sure. It's what you said.
Right.
So I think there's a question on world investing our marketing.
If I understand correctly.
Sure.
You cannot sue and assumption go ahead.
Yeah, I mean, typically you know I mean, we've all seen the shaft riding on the shift has gone from a.
We shifted our marketing this expense has gone from.
The traditional media that's more of a social media. So we have a very active campaign.
Campaigns on social media of all the things that I think everybody is very familiar with whether it's a tick tock Instagram Facebook all of these things.
Really our goal is to really communicate where the.
Oh yeah.
Whereas the shoppers and the consumers are basically interested in building our brands when we do that in partnership with the <unk>.
With the fashion houses so.
That's the first place and obviously, we continue to invest in the store the store is important.
Points, us, where where people make purchase decisions.
Want to make sure your brand slipped out look good and competitive with her in the store and they have to make that decision in terms of ROI. You know I think it's really the traditional question around.
But did you have.
This is Gerry does your media PR people always say.
We are.
You know we don't media works, we just don't know, which part doesn't work right, but overall.
When you build the brands and you invest behind the brands and their desirability.
What are the key business drivers that will drive the brand equity and those are typically believers that media that we follow and of course, we are.
We make sure that where we are investing either we're getting the best return for everybody either short term or long term.
So yeah of course, we look at our own.
Very helpful. Thank you.
Yeah.
Thank you. Our next question comes from the line of course songs with Dws Financial. Please proceed with your questions.
Hi, just a follow up on the AD spend.
Is there a threshold where you think that your sales is going to be too big to support a 21% AD spend and to get the same return that youre looking for.
No I mean, the reality is.
I think if you look at our brands or our largest brands are roughly 200 million range. There are significantly larger brands out there that spend significantly more I think at the end of the day there is a correlation between.
Sure sure.
Share of spend.
As long as you're investing in the right the right vehicles.
Over time, there is a.
Theres some gradual growth that can happen there. So no I don't think we feel that that would be the case.
But I do want to insist on the fact that.
Under investing over a sustained period.
It will result in us not delivering the growth that we want right. So this is why we are there.
Turning to investment to continue with us and I think again, the only thing that's helped us. So far is that this has been pretty much across the industry.
But he has been surprised by the market growth.
It has relatively been under investing in A&P, so our share our share of investment.
It hasn't come down, but I know, we're very we're keeping a very close eye on that.
Sure.
We're staying as much abreast to what the market's doing as possible right now anticipate that I anticipate with the static because otherwise, it's a big miss opportunity for us.
Our focus remains top line growth.
Got it and then my other question was just given the shortfall in sales this past quarter.
How are you doing as far as you know getting the the pumps and the glass that you need and fulfilling the Q2 and Q3 orders as they come in.
So I think there are a couple of things right.
Right.
You should.
Usually when you see shortfall is that fair.
Yeah.
We have we have published a recall that fiscal two.
So, but it's true, but we could have done more if we had.
What are the components.
So I wouldn't read too just to just to put things in perspective.
Sue.
We are we have made some improvement.
Yeah.
Supply chain by your plans with two we started a couple years ago.
Cool.
She used to justify the sourcing.
Especially on glass so today for.
Oh bottles, we have Oh boy.
More than one supplier.
Type of both of them so.
We ought to demerge bits of position.
Before but still.
The growth was unexpectedly.
Unexpectedly high you have an anticipated and that's why you're in Europe , we shipped around 80% of our lives.
The U S 70%.
Doesn't it doesn't mean that you sold those that have lost.
It means that a machine gun.
Little Rob.
In the quarter, you said you wanted to add something.
Yeah, just to build off exactly I was going to make that comment which was that if you Miss a case that doesn't necessarily mean you have lost consumption. There was inventory in the trade there's inventory with our distributors.
So it's not going to result in loss consumption is.
It's something that we expect to make up.
Okay, great. Thank you.
Thank you.
Thank you there are no further questions at this time I would now like to hand, the call back to Michelle for any closing remarks.
Thank you Daryl and thank you all for tuning in for our conference call. If you have any further questions. Please contact Karen daily from the equity group.
Our IR counsel telephone number or an E mail address can be found in our earnings release I'll. Thank you again for your time.
Looking forward to meeting some of you in the upcoming conferences.
Yeah.
Thank you. This does conclude today's teleconference. We appreciate your participation you may disconnect. Your lines at this time enjoy the rest of your day.