Q2 2019 Earnings Call
Greetings and welcome to the inter Parfums second quarter 2009 conference call.
At this time all participants are in a listen only mode.
The question and answer session will follow the formal presentation.
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It is now my pleasure to introduce your host Russell Greenberg.
I'm, sorry, Russell Greenberg Executive Vice President and Chief Financial Officer, if Interparfums.
Mr. Greenberg you may begin.
Thank you operator.
Good morning, and welcome to our 2019 second quarter Conference call.
We will proceed with our standard format.
After my review of financial performance.
Sean the dock, our chairman and CEO .
We'll provide an overview of our business and share some of our plans for the future.
And then we will open the floor to questions.
Before proceeding further I just want to remind listeners 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 include but are not limited to the risks and uncertainties discussed under the headings forward looking statements and risk factors in our annual report on Form 10-K .
And the reports we file from time to time with the Securities and Exchange Commission.
We do not intend to and undertake no duty to update the information discussed.
When we refer to our European based operations, we are primarily talking about sales of prestige fragrance products.
Conducted through our 73% own French subsidiary Interparfums I say.
When we discuss our United States based operations, we are primarily referring to sales of prestige fragrance products conducted through our wholly owned domestic subsidiaries.
As I read as I review, our second quarter. Please keep in mind that the average dollar Euro exchange rate for the current second quarter was 1.12.
Compared to 1.19 in the second quarter of 2018.
As a reminder, a strong U.S. dollar has a negative impact on our net sales, but a positive effect on our gross profit margin.
And this is because over 45% of net sales of our European operations are denominated in dollars, while almost all costs of our European operations are incurred in euro.
With regard to the current second quarter as compared to last years.
Net sales were 166.2 million up 11.3% from 149.4 million.
At comparable foreign currency exchange rates net sales actually increased 13.7%.
Net sales by European based operations Rose, 8.7% to 125.6 million from up 115.6 million.
Net sales by U.S. based operations increased 20.4% to 40.6 million from 33.8 million.
Gross margin was 64.3% compared to 64.0%.
S <unk> expenses as a percentage of net sales were 15.8% compared to 51.5%.
Operating income increased 19.7% to 22.5 million from 18.8 million.
Operating margin rose to 13.5% compared to 12.6%.
Our effective income tax rate was 29.5% compared to 30.2%.
Net income attributable to inter parfums, Inc. increased 13% to 12.3 million from 10.9 million.
Resulting in eight per diluted share increase of 11.4% to 39 cents from 35 cents.
Yes for the first half of 2019.
Consolidated net sales increased 7.3% to 344.5 million as compared to 321.1 million for the corresponding period of the prior year.
At comparable foreign currency exchange rates net sales increased 10.4%.
For the six month period.
Sales by our U.S. operations are running 35%.
Head of last year's first half and the increase in second quarter by European operations more than offset that small first quarter sales decline.
Net income attributable to inter parfums Inc. rose 16.4%.
The 31.2 million for the first half of 2019 from 26.8 million in 2018.
We have reviewed brand sales fluctuations.
In our recent press releases, so I will move to discuss on profitability inputs as well as the operating leverage that we are gaining.
Gross margin for European operations was 68.4% and 68.1% in the current and prior years second quarter.
As was the case in the first quarter the stronger dollar benefited gross margin, but the benefit was offset by higher than typical costs associated with the production of our new mom block explore a product line.
For U.S. operations gross profit margin was 51.6% compared to 15.2% for the second quarter of the prior year.
With greater sales of prestige products under license once again being the main contributor.
S <unk> operating leverage, especially for smaller and faster growing U.S. segment has been a very important contributor to our overall profitability.
In the current second quarter ESG in a expenses for U.S. operations increased 17.4% on a 20.4% increase in net sales.
And those expenses aggregated, 40.2% of net sales as compared to 41.2% in the second quarter of 2018.
[noise] with regard to our European operations, there was an 8.3% increase in S.G. today.
On an 8.7% increase in net sales.
[noise] promotion and advertising included an S. G and H was 36.4 million up 12% from 32.5 million in last years second quarter.
And were 21.9% of net sales up slightly from the 21.7% in last year second quarter.
We have significant promotion and advertising programs underway.
And we are still targeting 21% of net sales or about $150 million for promotion and advertising expenditures for the full year.
One other item is worth noting here and that's a $500000 loss on foreign currency exchange and the current second quarter.
Compared to a $1.5 million gain in last years second quarter.
Our financial position remains extremely strong.
We closed the second quarter with working capital of $376 million, including approximately 214 million in cash cash equivalents and short term investments.
With a working capital ratio of over 3.1 to one.
And just 10.5 million of long term debt.
We continue to look for 2019 that sales to come in at around 712 million.
Resulting in net income attributable to inter parfums inc. per diluted share of approximately one dollar and 88 cents.
And of course as usual guidance assumes that the dollar remains at current levels.
John Please continue.
Thank you.
And good morning to you all.
Before moving on to amuse and future plans.
I just want to review the status of our market.
As we reported for the first half of 2019, our two largest markets.
North America, and Western Europe outbound from last year, So Todd.
Weve sends growth offset pinpointed, prepas, five and 7.9% respectively.
Although again, yes, we have the middle East and Eastern Europe with sends rose, 28.8% till the middle East and almost 4% for eastern Europe .
Although the first half of last year.
As we anticipated with the launch of the New Love a woman's fragrance called again in <unk> and <unk> and that's sweet woman's fragrance called frontage on that made Asia bounced back after a slow.
School, though.
The nearly 7% said again in that market in Q2 mitigated most of the 9% since the decline in Q1 in Asia.
I would like to expand on that will release over June seven when we announced our 11 year worldwide Street once new license for all the Kate Spade New York Brian .
Kate Spade, New York like coach is owned by TEP is treatment, which acquired the brand in mid 2017.
Founded in 1993, the growing needs of global life on style House, Weve handbags ready to wear jewelry footwear gift.
Home and fragrance.
Published its full full details on the modem sophisticated use of color.
Oh, the Kate Spade, New York founding principle.
In fiscal 2018 that brand generated 1.8 billion in says and operated 342 stores directly.
That'd be three umbrella gives the Kate Spade New York.
The strong foundation and expensive resources to support global role.
With the success, we have had to date is to run coach that there's three has entrusted Kate spade fragrance to us and we intend to leverage our brands group of them show, bringing its unique and empowering seeming positioning to fragrance for a woman around the world.
And Bill this agreement, we will create produce and distribute newpage Hughes and fragrance related products.
Gerberding to department stores, and specialty stores and duty free shops, as well as in Kate Spade, New York retail stores.
At this point in time, we're evaluating the brand's existing fragrance both for you to determine which if any of the line will continue producing and distributing.
That's a determination should be reached by the end of this year and it now looks like we will have all the new Kate spade stance on the market in the fall of 2012.
Hi, well overall news will you be up not relates to our direct to consumer equal enough. Some of the prize, which will debut next month, when Bolivia and read your website is up and running.
So scientists who happen to be followed by summit for the holiday season.
Well the pieces of what goes on in place the whip side the product so popular fees month, plus an extensive advertising and promotion campaign.
As we have stated before this companion [laughter] focused we have a new they smoke and social media buys and the targeted p. off strategy to reach online industry. So.
So he aldridge would be pursuing for our own channels as well as the newly Eldridge Bofa Instagram handle meetings have already taken place, we fashion and beauty it isn't a week and expect to see put things into the October and November books.
To build buzz and excitement we have to stop the launch event Planful. This Sunday of New York fashion week in September .
[noise] moving onto Planful as sick in the house, Oh, Yeah and Nick.
Good though 24 hour allows there's been more blow all well, we introduced a new woman line and the flank a thought montblanc explore.
So we'll be end of <unk>.
Yeah, well either hot will have an entirely new Jimmy Choo men frequency meeting.
And 2000, Twentys, Jimmy Choo will add the human side, and we plan to until the beauty already now we really seek and then publish the world the filled all fourth quarter of 2012.
Coach will also have a major loss of the woman's side into the unplanned.
Looking at the U.S. side of the business Gary has quickly become a very large old launches brand within the U.S. based operation we have unlocked.
So Pete off stump crude with a line called nine from 81 of those tons or less where domestic distribution of the dual commences. This proved to be followed by an international roll out in the fall.
The World Yeah run this year round.
Well, we launched seductive law and Nobel brand extension Jewel.
We'll begin domestic rollout we've [noise].
International distribution coming next year.
For 2020.
We have big plans. We then you a much more upscale blockbuster a woman scent called they love it all they do to get to the Supreme domestic again, the Ford International.
Well, unless we enter 2019 or launches we saw.
On rules to come out run extension such as frontage on that made sweet dreams and since you wish we'd distribution focus throughout Asia.
We have a major unless we launched on vision 2020, we have a new fragrance family called Sky.
Lastly, we are in the final stages of development of a woman's.
And collection for alcohol the jewel.
Unbelievable 2020 Uh huh.
In February or March so it was six months excuse even after which would be all felt to me, though premier retail venues.
So why do we have a lot on our plate, we're still in the market for acquisitions licenses, Ontario brands all on the whole company.
But anyway, you contemplated must be compatible with our business model and also good growth potential and as being fairly broad.
To conclude we control reach and divest books.
Oh, we are well positioned to drive organic growth.
We have a strong balance sheet.
As was mentioned before should the right deal cross our pie.
Hi, well global distribution network is exceptional comprised of organizations that get public they starting to ride through news do you like that where I don't phasing and promotional programs <unk> territories.
And optimize it says in the 120 countries, where our products are so.
So that's it from my box and now operator, I would like to open the floor for questions.
Thank you the floor.
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Our first question is coming from Joe Altobello of Raymond James. Please go ahead.
Hey, guys good morning money.
First question I'll give it to a little bit weak this quarter and I'm guessing a lot of that had to do with timing.
Just kind of walk us through why give me to the brand was down 20% year over year.
[noise], yes, so it's really a Jimmy Jimmy Choo is business. He is a very sound the v. so lead it.
It's really a only a matter of a of a calendar of a launch we're going to have a major launch in the second half of <unk>.
Yeah.
Q3, Q4, we'll introduce.
ER product or how well then you.
This would be the second Jimmy Choo a men's line.
We are very optimistic so there's absolutely no problems whatsoever on Jimmy Choo.
Uh huh.
Yeah, Hi, just a I agree I agree with a with Sean I think it really is a matter of timing. If you remember from last quarter, Jimmy Choo was up a really big in Q1.
Now, it's down a little bit it's down a bit in Q2 overall for the year. It's it's not down it's actually flat its up slightly a and we expect it to end the year on an upbeat as we introduce new products later on in the year.
Got it Okay Thats helpful. Thank you and then just kind of shifting gears Asia.
It did rebound guys you guys expected this quarter or were there any impact from the demonstrations in Hong Kong and secondly would you expect that market to be up for the full year I think he's got a couple of points up or down.
Yeah. It was down a it was done that really to beat in the first half, but a ton silver who events in the in the Hong Kong as of now I didn't have it is impacting that whatever business. We have a very important business in Hong Kong, especially weak on a three and two andas on file.
Ooh and do.
[noise] ER I think that at the end of the year over who we can look at being a little up are going to depend on the bottom of the new launches that we have.
In the region, but we do not see except maybe something that we cannot be Korea duty free but that does come till balance by over <unk> by stronger or duty free you listen in Japan, or I would say that to the business is sound in a in Israel.
Russ.
Yeah, No no I have a I agree I think it it really depends on on the traction that we gain from a from the new product launches of Anna Sui later on in the year analog bond those are some of the biggest products that we do distribute within the Asian market.
So overall I think we'll be we're expecting it to be up a little bit for the full year.
But I don't see I don't see any other problems with that yeah.
Okay. Thank you guys appreciate it.
Thank you Joe.
Thank you. Our next question is coming from.
Both.
Please go ahead.
Hi, guys how are you doing.
Good morning, My name, though.
So just a little question on the Kate Spade license you mentioned.
You wouldn't be having your new send out in second half 2020. So that's great. Yeah I'd, Yeah end of 2020 and okay. So my understanding is that there is a current licensees is selling some product in the market place.
Do you think you'll be able to post any sales of that existing product line in late 2020, or do you think there's going to have to be some clear through the inventory that they had sold into the channel or.
You have any expectations for that situation in 21, yeah, Yeah, I cannot answer on that well not planning to have ER says Oh, the existing line for 2012.
Because we will let the fall no licensee sell through.
And Sheila So Scott Oh, maybe even say can walk though of 2020.
So we are not forecasting to have in says of existing products of Kate spade for doesn't work but.
Last quarter, though.
Oh Dobell from Bill doesn't 20, we shouldn't be launching a venue or the new line of Kate Spade New York.
Okay, Great and I'm, just you know in looking at the two brands coach in Kate Spade.
You know, obviously code has more retail stores globally than Kate spade et cetera. So can we kind of drawn analogy about the sales potential like so in other words, Kate spade could be something important for you guys, but maybe not the sales potential of coach is that something that would be like accurate to think about that way.
That's a fair assessment cool cool Weve coach we we we really have a we have a real success.
Over $100 million well have a projections will business plan or so as you know we are oh, we like to give a full.
Of course of its you've projection. So we think that Oh, Kate spade will be a different small, though then quotes but we have seen from the so some interest in the Japan or UK and of course, the main buckets would be the U.S.
So we offer we're confident.
With Kate Spade, but definitely a it would be a smaller business.
I don't want to quantify I think it's too early to quantify today Oh, how much we can do with the Kate spade.
But let's not go too.
Okay.
And then just.
Oh, just on the I mean, obviously, we all heard about the next round of tariffs effective September 1st you guys don't have terribly big big exposure, but I know some components and things are manufactured in China. So are there any additional impacts that you would be seeing from the September 1st tariffs or just what you've already seen and dealt with.
Okay from what I understand but through us with Oh, we will complete my on so from what I understand we are we are we have taken the eat or on the we've had a we've a Chinese studies, because we bought from China or some components. Some plastic some metals some cost on some components of it goes.
To make the finished product.
Here in the U.S.
So we have a diary for 25% is already countered and its already in our projection.
Russ.
Yeah that is correct, we have been absorbing the additional 25% tariff I just was also a through through some of it being absorbed by some of our vendors. The new 10% tariff is one that is a different product that doesn't affect oh. It doesn't increase the amount of the terrorists. He was really basically going after things that have not yet been hit with tariffs are the one thing I do want to mention though although it is flowing through our numbers and we have been able to absorb that we have also embarked on several different plans.
In order to mitigate the impact of these terrorists, let's also keep in mind that most of the finished product that comes in through the United States operations is actually we export it so we've put together and so many different plans.
Product can actually avoid being brought here into the United States and that has helped US also mitigate some of the the effect of the tyres.
If people are interested of course will be able to give you more details about the.
Your warehouse, if you're going to have in that freezing in Shanghai also some some feeling that we're going to make a into Q4 some promotional Christmas gifts that so we have a we have taken action and we have a footprint, but for sure in 2019 or at least 25% to that if you could think of a company a couple of millions a explained because the.
Okay. Thank you so much.
[noise] actually went to.
Thank you. Our next question is coming from.
I think of Jefferies. Please go ahead.
Hi, This is actually Hoggins on first half was saying thanks for taking our question your guidance implies a three point stepped down in the back half is this related to purchase order trends increased competition or a function of concern in it.
Thanks.
I see then goes the question I'm, sorry, Yeah, [laughter] that they basically the question was basically Oh.
It will be a a a a an implied a slow down in sales in the second half as compared to the first half Oh you took it to answer the question the biggest impact a in connection with sales throughout 2019.
Is foreign currency effect, a we were in an environment today, where the dollar is extremely strong, especially compared to the earlier parts of 2000, and an 18, a as I mentioned at the very beginning of our call for the second quarter alone. We're comparing a rate of 1.12 currently compared to last year 1.19.
I as the year went on to 2018 the rate got a little bit stronger. However, today, we're in an environment, where the rate is now down to 1.1 or 1.11. So that is really what's implying the perceived slowdown in ourselves when we look at the the numbers in <unk> and constant dollars, they're a lot better than a than the absolute dollars implied.
Okay, great. Thank you and congrats on a great quarter.
Thank you so much appreciate that.
Thank you. Our next question is coming from habit of course.
Lee Aldredge that you're doing more social media on but more of your legacy brands are you changing up any your AD added marketing approach.
[noise] [noise].
The answer to me, Jeff I'll answer quickly I think John can probably go into more detail, but absolutely.
Especially in certain markets around the world that like the Asian market, we're doing a lot more digital a lot more social media type of of advertising dollars in lieu of the standard magazine.
Historic sense strip type of advertising.
I didn't hear what the question so it's about the.
How much did you do this is the right thing yeah Trent trends are we seeing any change of trends in how we're spending money on advertising.
The <unk> budget for DG tool between Paris in New York, So well.
Well the visions combined.
We more than doubled if you're comparing to last year.
And we'd expect the next to the <unk> to become the main.
Medium of a majestic.
Okay and then.
Another questions is there are there are some brands like the Lily Aldridge, where you don't have any revenue existing right. Now so does that mean that you're compensating from another brand to get to the 21%.
Or is it are you just assuming it will the aldridge generate some sort of revenue.
That you are you can you keep AD spending a 21% of sales.
Yeah, that's funny when I said, yes, yes, yes.
So stop me if I'm wrong was but that we say, we've always lucky yet which would be a a heavy civil sometimes we spend that he doesn't know it depends of a of a cannondale of launches, sometimes we spent a little less but.
As I said in many calls when we see that even if you go do tend to invest more in a adopting a you know they have to gain market share faster and quicker. So I love guns are performing well maybe markets.
Mobile launch Oh coach I guess so.
We continue to to to spend to be stable.
And my final question is that you've used the word major a few times a referring to next year's launches should we assume that you know when you use majors it'll be more of a revenue benefit versus a something like a flanker product coming to market.
[noise] Oh definitely when when John uses the word major he's you're usually we're we're referring to the brand itself or the size of the brand and whether or not it is a a new fragrance family as opposed to a flanker or an extension.
So as we go into 2020 as an example, we talk about the the new coach or the new coach line for two for early 2020.
We talk about a gas being a blockbuster for four Belvita, which is also geared for 2020.
So that's kind of what we're getting at in connection with with major with the word major.
All right. Thank you.
Thank you honey.
Thank you at this time I would like to turn the floor back over to management for closing comments.
That's great. Thank you operator, and a once again, thank you all for turning into to our conference call.
As usual if anybody does have any further follow up or questions, whereas even John mentioned, if you want further clarity with respect to some of our plans on or mitigating some of the the additional tariffs that were absorbing can always contact me at my office. Thank you so much for joining and have a great day.
Ladies and gentlemen, thank you for your part.
This concludes todays event you may disconnect your lines at this time and have a wonderful day.
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