Q2 2023 Inter Parfums Inc Earnings Call
Greetings and welcome to the inter Parfums 2023 second quarter earnings 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.
As a reminder, I'd like I'd like to remind you that this conference is being recorded.
At this time I'd like to turn the call over to.
The vice President at the equity group and inter Parfums Investor Relations Representative Karen Daily.
Thank you Diego joining us on the call today will be chairman and Chief Executive Officer, John Bizarre and Chief Financial Officer, Michelle Outweighed.
On behalf of 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 results.
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, and subsequent quarterly filings 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 the information discussed it's now my pleasure to turn the call over to John Madora, John You may begin.
Yeah.
Thank you Karen.
Good morning, everyone and welcome to our second quarter Conference call.
Most of us are already aware, but the fragrance industry is booming.
We are pleased to have seen a continuation of that momentum during the quarter.
With our increasing market share we continue to be optimistic in our upward trajectory.
In fact, we continue to fire on all cylinders to meet the needs of distributors and retailers.
Sure that we not only attract but also retain both the new and very experienced consumer.
On a consolidated basis.
It says increased 26% in the second quarter.
This comes on top of a robust. So are you are you a period in which we had already experienced 18% growth.
Beginning with our business by region.
While the second quarter, our two largest regions North America, and we're still in Europe increased mid says.
25% and 26% respectively.
In Asia.
Spike challenges in China well.
Well doing well and we do see them.
10%.
Most of these things to a very strong business in southeast Asia and Australia.
We also experienced.
Significant growth in other regions, including Eastern Europe , and the Middle East.
Up 122%.
And 23% respectively.
We continue to see renewed life in our travel retail business.
Thank you.
Duty free six two.
Demand for luxury and premium brands.
Creek and utilization of the Retuning process also boost instead.
With respect to our European based operation well since 2% owned subsidiary called desktop I see net sales increased 19%.
Primarily driven by well by us.
Our top performing brands.
Jimmy Choo and Montblanc.
But increased by 28% from 21% from long and 10%.
[noise], respectively compared to the prior year.
Yeah.
Both Jimmy Choo, and montblanc surpassed $100 million and sell through the sell small till 2023.
Mobile sales were strong at 55, you get into quarter.
Other than 16 million for the first half of 2023 grew.
Growth drivers include the continued careful after four months of the Montblanc legend lines.
And the growth of the Montblanc explorer line.
Which was recently bolstered by the introduction of the Moblog smell blood stem extension.
Jimmy Choo says, we're all still formidable bulky 6 million into Costa how do the 9 million all of this first.
For 2023, I want to continue to be an Intel has shown success are still launching in 2021.
Sales were also boosted by the debut of two flank is Jimmy Choo, I won't youthful and Jimmy Choo rules passion, which came to market in late 2022.
And early 2023, respectively.
Coach has experienced steady growth in the quarter.
Nearly all lines for both genders. So increased in March in addition to the new fragrances coats love and Koji Green.
Although the rules drive this where somebody will own brands, Nova which achieved modest growth in the quarter, we thought the U S insurance.
The whole shots, which still strong says in order with us with timeless straight months, and we don't just Osha Gil life, the eco responsible line.
On the subject of Russia, you may have read that our desktop I saw will not minaj, all the marketing and communications and licensing activities for both the fashion and the beauty business.
Moving on to our U S based operations, our wholly owned domestic subsidiaries net sales increased 42% on top of a healthy two 9%.
To some girls during the second quarter of 2022.
Continue with continued success of our brands.
Guess fragrances, which increased 50% in the quarter and across all geographies more than made up for the challengers.
Billions in the first quarter from the ERP.
Implementation.
The second quarter performance and guess, what it's driven by this says about the U S. P S deductive blue and Aqua.
Yeah.
Touching on the ERP implementation, we're in much better shape today.
While we still have to continue to train our teams and have many additional and then some months, we would like to implement to fully get children beneath pizza. When you spin we see light at the end of the tunnel.
Our teams are working with external providers and subject matter experts weekly to ensure we remain on track.
Want to take this opportunity to thank the organization well.
For their unwavering support and hard work during this critical transition.
Looking at C. I got more fragrance sales were stronger, which we recently reached we see stuff sense senior in Sydney, and so would you say the collections I would like also to share, but I'll still spends off magazine selected C. I got more senior and that you'd be at all and its favorably.
You seem to have 2023 meeting the irresistibly yoga studied spending in inspire a bottle design.
And finally, the combination of a donut callahan and you'd get an wife's franchises.
In just one year's time become our second largest U S based advance.
An experienced momentum in the quarter.
Our brands are in high demand and we have an exciting lineup of extensions across many of our brands.
And Julien the second half of the year.
As previously disclosed other Colombian feature yes will be joining our portfolio.
And later in the year, we expect to launch guess bill hasn't stopped body Xu Jun, let you felt they buy so much yeah, and then can you send that blurs.
Uh huh.
Moving on to the key themes in the fragrance industry.
On the last call I mentioned my most recent visit to China.
And since then the momentum has continued at the same pace.
And we continue to see signs of incremental improvement we.
We anticipate modest sales growth in China.
Back half of 2023 and into 2024 and will continue to be patient as China. At this moment is a very small portion of our book will continue to money built a region and when the time is right, we would be ready and able to deploy it.
With these you know to take advantage of this immense market opportunity.
Although notable topics.
Rule, but both no longer a concern our supply chain and inflation.
Supply chain disruptions are mostly behind us.
And the inflationary impact on components.
Generally leveled out.
The shoe comments of the competitive landscape before turning the call over to Michelle our CFO .
Competition is favorable for us today.
And we are all well positioned to continue to execute on select key than strategic acquisitions as they become available.
Most recently in July we unveiled into an exclusive worldwide fragrance license.
Roberto Cavalli blood, which will be managed by our extraordinary team in Houston.
Well on Tuesday, Arizona, Fovista acquisitions, Tim stems from the sophisticated luxurious and strong well design of all of that to come in.
We believe that together these fragrances and compressed maximalism in this world of minimalism.
And really strict cognition in Europe , and the middle East.
We believe it can be a globally recognized name.
Whose appeal to contemporary weakest somewhere else without both younger and younger talked well.
We are proud to be the licensee and welcomed the distinct name.
Well corporate due to our current portfolio of trends going into 2024, we expect to introduce two brand extensions followed by a blockbuster in 2025.
Now I will turn it over to Michelle to review, our financial difficult months Michelle.
Thank you Joe and good morning, everyone before starting I just wanted to maybe make a small correction I think are enjoying section you talked about the growth of montblanc.
For Jimmy Choo was 21% and the growth of mobile in the quarter as a 16%.
So quickly I'm going to touch on FX, obviously as you all know FX had a major impact in 2022.
But so far this year, it's only been marginal for the second quarter of 'twenty to 'twenty three we had a favorable one 3% year over year impact on net sales well. It has had an adverse a 0.5 year over year impact for that for the first stops are relatively marginal.
I'm moving on to gross profit on a consolidated basis gross profit increased 23%.
288 million during the quarter.
As a percentage of sales gross margin decelerated, though to approximate by approximately a 190 basis points.
As you've seen in our press release, while we've registered scale benefits from our sales growth.
Our price increases and favorable brand and channel mix. This was offset by a one time conservative inventory reserve up $7 million related to certain underperforming brands within our European operations for which we have built inventory during the pandemic to protect service level.
Excluding this one time charge gross margins would've expanded by 28 basis points compared to the prior year period.
On a year to date basis gross margins are flat versus the prior year period before adjustments, but net of adjustments are we actually would be down by 110 basis.
Basis points.
For operating based for European based operations gross profit margin was 63% and 65, 6%.
Net sales for the three and six months ended June 30th.
And that is down 390 basis points, and 130 basis points compared to the corresponding prior periods.
This obviously includes the inventory adjustments described just before.
Excluding this one time adjustment gross margins for European based operations would have contracted by 40 basis points in the second quarter, but expanded on a year to date basis compared to the prior year period, as we took pricing and enhance our brand and channel mix.
But the United States based operations gross profit margin was 57, 2% and 57, 4% of net sales for the three and six months ended June 30th.
That is up 290 basis points and 330 basis points respectively.
As compared to the prior year periods.
Second margin expansion stems from a number of factors largely due to price increases we took early 2023.
Both the brand and channel mix, and obviously, a higher portion of our higher priced fragrances being sold directly to retailers as opposed to third party distributors.
As stated on the last call our margins has only been moderately affected by inventory cover and FIFO accounting and the other thing to note.
The significant increase in sales in the first half of 'twenty three allowed us to better absorb fixed expenses, such as depreciation and point of sale expenses as compared to prior year period. All of these have obviously helped with this margin expansion.
Now turning to SG&A.
On a dollar basis SG&A expenses increased 23% to 233 million for the quarter.
However, given our 26% sales growth SG&A improved by 120 basis points.
As a percentage of net sales from the from the prior year period.
For European based operations SG&A represented 45, 1% and 38, 9% of net sales for the current second quarter and first half respectively.
As compared to 47.4 and $42 four in the respective prior year periods.
Our U S based operations SG&A represented 39, 7% and 41, 3% net sales for the second quarter and first half respectively.
As compared to 37.8 and $39 five in the same periods last year.
The increase in SG&A for our U S based operations as a percentage of net sales is primarily the result of increases in promotion and advertising as well as the on utilization intact I'll just structural investments in our U S operations that we have made throughout 2022 in order to support the new licenses. This represents about 7 million.
For the first half of 2023.
Royalty expenses are included in SG&A, and you know, which generally are in line with the prior year period at seven 8% for the quarter.
Moving on to promotion and advertising, which is an integral part of our industry.
We continue to invest heavily to support new product launches and to build brand awareness and anticipate that on a full year basis promotion and advertising spend will approximate 21% up net sales for.
For the quarter and six months ended June 30th promotion and advertising expenses represented 17.6, and 14, 5% of net sales.
It's a normal order of business promotional advertising generally picks up in the back half, especially in the fourth quarter due to the holidays.
Now moving to cash we closed the second quarter with working capital of $480 million, including approximately $187 million in cash and cash equivalents and short term investments maintaining our working capital ratio of 2.421.
We continue to see working capital growing in lockstep with our growth accounts receivable is up 18% from year end 2022, and the balance is reasonable based on second quarter 2023 record sales levels and for our flex strong collection activity as days sales outstanding was 68 days down from 76 days and of course.
We're responding period of the previous year.
Inventory levels as of June 30th also increased 23% from year end 2022, and support our overall sales growth and the holiday season.
As you know our strategy is to carry more inventory overall to protect service levels, especially in a volatile context like like we've had.
Our long term debt totaled 139 million at June 30th primarily due to the inter Parfums I say headquarters acquisition and the acquisition of though of course trademark.
As we reflect on the positive momentum of our brands and the overall fragrance market driving our strong first half we are confident that we can achieve another excellent year.
Especially with clear visibility on future orders for the second half and in consideration that supply disruptions are mostly behind us as Sean pointed out as.
As such we have increased our full year 2023 guidance to approximately $1 3 billion in sales, resulting in net earnings of $4 55 per diluted share up from our previous guidance of 425 per diluted share and 20% versus 2022.
With that operator, please open the line for questions.
Thank you.
And ladies and gentlemen at this time, we will conduct a question and answer session. If.
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.
You May press Star two if you would like to remove your question from the queue.
For participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys once again to queue up for a question press Star one.
We will pause for a few moments, while we pull for questions. Thank you.
Our first question comes from Ashley <unk> with Jefferies. Please state your question.
Hi, Thanks for taking our questions. So the first question I know that there could be your first year, having gift sets in a couple of years I'm just how should we think about you know Q3 versus Q4 sales and then any color you can give us on the brands that were included in Victoria write off inks.
Hum.
Sure.
Yeah. So I mean, obviously as you know last year, we had a we had some supply challenges on gift sets and somebody gets that's why I'm, saying you know moved from from Q3 to Q4. This year, we are expecting to have a more sales in the third quarter of gift sets and obviously lessen that.
Our fourth quarter, so as we look at our our growth for the for the subsequent quarters. We are seeing more growth in quarter, three and then in down quarter for us as we as we know as we look to the balance of the year in terms of growth rate.
Hum in terms of the inventory write off I think you know you've seen the communication you know from our colleagues I didn't your profile you know all of the brands are growing quite significantly as you can see there is some we've had some challenges I'm unclear.
Pretty large job growth in the base and what we're what we've what we're seeing right now is a bit of a slowdown of.
All of that growth. So when we assessed our inventory levels are we would prudently decided that oh, we needed to write down and the inventory that we had that was beyond China beyond two years that doesn't necessarily mean that we're gonna destroy it obviously, we have all intents to Oh, you know bring the brand back on track and and.
And then hopefully not managed to consume some of things, but when we wanted to be prudent and reserve. What we felt was those right from an accounting standpoint.
Okay.
Thank you.
And our next question comes from Corin Wolf Meyer with Piper Sandler. Please state your question.
Hey, good morning, guys. Thank for taking the question.
I'd first like to touch on that.
I like the margin outlook for the remainder of the year and even if you have a little bit of color, but I think we've previously talked about 18.
18% operating margin target this year and kind of similar going forward a little bit of extension.
Is this inventory write off the gross margin hit that you saw this quarter impacting that outlook if at all and is that still kind of the rate.
Target to look at if you look at the out years as well. Thank you.
Yeah, Hi, Corinne, maybe I'll take that and then John you can chime in yeah right now we're still projecting an operating income of about 18%. So that is consistent with our with our guidance.
Okay.
Got it helpful. Thank you and then just lastly on the increased and bank and as you think about the guidance for the remainder of the year.
Top line is baking in and benefit from your increased advertising.
And then how are you thinking about the ROI on these investments.
Okay.
Yeah I think we are you know we regularly get these cities are these these questions right I mean, the way the way our business model works as you know you're basically selling in inventory ahead of certain key consumption periods. Obviously, there were a number of key consumption periods like mother's day father's day Valentine's day in and holidays that are.
Happen across the world. The Big one obviously is the holiday season, you know in December and generally what happens is we sell in the inventory.
And then we you know drive consumption in the store through strong advertising and promotional expenses. If you don't do that essentially what happens is your inventory doesn't get consumed and you end up taking you ended up taking it all back you know in the subsequent quarter hour, if if things go well, which is what we've what we've been experiencing.
<unk> now for them for a couple of years is that advertising drive strong sell out in the stores and then our retailers reorder in January February and March So really I mean, that's how we really typically we will measure the ROI now in terms of where we spend and I'll, let John chime in after this we typically obviously spend where are we you know we have the best or why are we.
We've shifted a lot of our expenses towards digital media.
You know, we selectively invested in outdoor where it makes sense, but generally speaking obviously, we if we look at ROI for our for all of our expenses and we tried to invest where we know that Oh, we have experience and strong results in terms of a return on investment.
Oh, absolutely yes. It did your toll is a bigger chunk of our.
Spending and.
And.
And then we'd see the split between the two largest market.
Yeah, Americas, North and South and two.
In Europe .
Yes.
And to go back to the margin the 18%.
He's absolutely feasible.
We think that even though we have this.
This reserve.
Eventually we'll be able to.
To.
Do we see the 18% margin.
Yeah.
Thank you.
Yeah.
Thank you and just a reminder to the audience to ask a question at this time press star one on your telephone keypad to remove yourself from the queue Press star two.
Our next question comes from Ahmed of course of course, then with B Ws financial Please state your question.
Hi, So my first question was could you just provide a little bit more.
Granular a level of what you're seeing as far as consumer demand goes is this really all being driven by the new products ive been releasing over the last six to 12 months.
You know, it's a growth driver and really more about consumers just having more options to use at home.
And then what your you know your expectations on the consumers are tapped out is how much how many fragrances they have at home.
Yeah, it's a very good question.
I will try to answer what.
What we see in our lives, we see growth in our existing lines.
Lines and also through innovation. So products that are that are used to it for more than 24 months.
<unk> growing.
Especially for our largest brands.
Coach Montblanc.
Did you mean to guests and DKNY ER Doctor Han.
And we said that and I would say that on top of visa growth, we have growth coming from innovation.
Innovation, new products new lines. Thank guests, both boosters et cetera, that's why we're having such a growth which is b given the when I welcomed should.
And we give it in the market.
And we do not see.
Would you didn't see it in July we didn't see in the.
The first two.
A couple of guys, who do not we do not see any sign of Oh food. So of slowness do contrary things Uh huh.
Continuing good too.
To be quite two groups.
We are shipping on time to be sure I Love you search so we have started to two.
To send them the worldwide.
So we will have a longer.
Since the so you said in like Michelle said, because it will start stronger advertising in the end of first quarter beginning of fourth we expect to have a good sell through so we can generate new businesses in January and February so things are doing quite well.
Yeah, maybe I'll just just to build on an undrawn on the on the on this so first to be the innovation, if it's well designed and well executed. The flankers are are are intended to hero, though it's a halo on the rest of the lines Alright, and this is one of the reasons why our innovation is working.
But also our our historical lines because the the the innovation and the flankers are are designed to do that on your question around consumption again, we don't get a lot of you know regular data, but what we are seeing very clearly and this is resulting in significant market growth. If you look at NPD data for example in the U S. You know Julien.
P. D data was again very strong because the market is up 11%, it's up 13% on a year to date basis and what we're saying really is is there is clearly an increase in penetration.
And the category Oh, there are new people that are entering the category historically the U S was underpenetrated versus Europe , where we're seeing that penetration growth and we're also seeing more usage I also coming to the point you were asking before I'm more fragrance more fragrance usage as people may be wearing a fragrance in the morning now also wearing one of them.
The evening or vice versa. So all of these things are driving the driving the category growth and we believe they are sustainable and we're not seeing any any slow down at this point in time.
And we'd like to others, so, but we've seen a very strong good trend with our men's fragrance business.
The men's as you know, it's a smaller box other than the women's business, but it's growing.
It's a very fair space.
Men's used to have only one or two fragrances today, they are willing to try a little more than one or two and we see it in our numbers.
And could you just talk about that.
Q3 in the holiday.
Inventory build season.
The retail level is it any different than prior years that you've seen as far as the how the retailers are reacting.
Okay.
What I can drive retail lives are as you know retailers are looking at their inventory very carefully most of them are on the E. G. I reversed so although a need based on the true you know they'll not to create too huge.
Our backlog.
And we do not see any no problems with too much inventory or maybe at the contrary I shouldn't go quite liked just before the season.
And diffuse we see in the U S Department stores and also in the Western Europe .
Germany, or France or Spain.
Sure.
Yeah, I was no nothing nothing really more to add I think what we are saying is you know typically last year. What happened was gifts, that's where you know because of the supply challenges cause that's weren't available. So I think you know a number of retailers. We weren't if you weren't able to be fulfilled and we saw probably you know more gift sets arriving in.
In the second quarter, and the fourth quarter, and then basically being sold through the fourth quarter. So hopefully with supply chain problems abating. We should we should start to see you know we are starting to see earlier purchases and we should see you know have a longer holiday season to solve some of the stats there.
Okay. Thank you.
Thank you.
Our next question comes from Linda Bolton Weiser with D. A Davidson. Please state your question.
Yes, hi, so I'm just a question on gross margin.
Yes, with all the gifts that being more sales this year than last year in the third quarter.
It just tends to be a little lower gross margin plus you have the stronger euro, which I think would hurt your gross margin. So I'm sort of wondering if you can give a rough.
<unk> outlook for gross margin specifically like in the second half do you think it can be up year over year.
Or is there any kind of rough way we.
Should we be thinking about gross margin in the second half of the air.
Yeah. So right now you know if you look at the first half our gross margins have been roughly flat and you know I explained you know some of the reasons on the on my head of you know during the during our prepared remarks right. Now we are projecting for a lot of the reasons. You've explained we are we are projecting some.
Erosion in our gross margin for the second half one we have obviously a bigger proportion of our business what gets that the other aspect as well as as you know our U S operations is growing more rapidly than.
And then our our European operations and our gross margins are typically lower on our U S operations.
You know it's so so those are some of the factors that are going to come into play and there's also obviously some of the cost increases that.
We're going to continue to make their way through through our costs through our through our P&L.
So those are some of the factors. So we right now we're modeling we're modeling a slight deterioration in gross margins for the year for the second half of the year.
And by that in there what was it you mean on a year over year basis is that correct.
Yes year over year, obviously gross margins are.
Yes, absolutely.
Hello there.
Thank you and then can I just ask also about inventory.
Oh, Yeah, it's correct quint creeping up a bit despite the fact that the component shortage situation is getting better. So I guess I'm. Just wondering like are we running a risk of another inventory write off in the future as your inventory creeps up here or maybe you can just talk about are you targeting a certain inventory left.
For the end of the year.
Just maybe some color on that.
We think our inventory levels, you said the right fit.
It's not so good that you can get to it.
Two nice increasing says we have to have the inventory and you can set up to choosing between the two we decided to.
Take two.
So.
Congo.
You shouldn't forget.
Sure.
The good news, so I do not seen between that between the.
Big Reserve like we have done in the second quarter are good.
But the good thing is.
When you look at that business and even though we don't have an issue with the Colo sizes. All those zones, we sell the same product.
For the quarter and I still have a quartile.
As opposed to other industry.
Sure.
We think it was the right thing to do to to create these physical components certain components that we have.
Book to Bill.
Hi, let me clear, but we do not see any problems he doesn't want that to them.
Okay sure.
Yeah, Oh, yeah.
No no no nothing more to agile.
Okay.
Thank you can you just say.
Whether China in the quarter in the second quarter was up or down year over year and sale.
Yeah.
I don't know Shane Yeah, Michelle do you have in school.
Yeah to the best of my knowledge.
You know our China sales are are actually are actually down because we are you know we continue to run down our inventories, but again you know China is relatively moderate in our overall overall sales number.
Okay. Thanks, very much I appreciate it. Thank you I just wanted to maybe build on John's comment around the inventory right I mean <unk>.
Normally you know normally we don't have these kinds of AR write offs are we haven't necessarily destroyed anything I think we're just being prudent because we feel that the level of components. You know it was above you now for some specific lines is above well, we know where we would like them to be so this is more of a basically us being put into it.
Doesn't necessarily mean that you know this will be will be destroyed.
You know decided to completely write them off.
We'll continue to you know to monitor this and you know if you know.
Things can move very very quickly, particularly for some of these smaller brands are you.
You can you can get a very quick turnaround it could be successful in a market and you know that the sales required to get these consumed or is relatively small I mean remember we're looking at roughly a 2% write down of our inventory. So it's it's relatively small in the overall scheme of things.
Yeah.
Thank you.
Thank you there are no further questions at this time I'll hand, the floor back to Michelle Atwood for closing remarks.
Alright, well. Thank you again for joining our call today next month, we'll be attending the 20th twenty-three Piper Sandler growth Frontiers Conference on September 12th and 13th in Nashville, and will return to New York to host our annual meeting.
Headquarters on September 14th so if you'd like to attend the annual meetings or have any questions. Please contact Karen daily from the equity group, our Investor Relations counsel her telephone number an email address can be found in our most recent earnings release.
Thank you again for your support and and have a great day.
Thank you. This concludes today's call apart you may disconnect.