Inter Parfums Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 9, 2023

There are 6 speakers on the call.

Operator

Greetings, and welcome to the Enter Parfums First Quarter 2023 Conference Call and Webcast. At this time, all participants are in a listen only mode. As a reminder, this conference is being recorded. At this time, I'd like to turn the call over to Vice President at The Equity Group and Interpark Room's Investor Relations Representative, Karen Daly?

Speaker 1

Thank you, Daryl. On behalf of the company, I would like to note that this conference call may contain forward looking statements, which These factors may be found in the company's filings with the Securities and Exchange Commission under the headings Forward Looking Statements and Risk Factors In our most recent annual report on Form 10 ks, forward looking statements speak only as of the date on which they are made, and Inter It's now my pleasure to turn the call over to Jean Mezarte, Chairman and Chief Executive Officer of Inter Parfums. Jean, you may begin.

Speaker 2

Thank you, Karen, and good morning, everyone, and welcome to our Q1 conference call. As in Drast, I will start the discussion and then Michel Atwood, our CFO, will review our financial performance, For anyone new to Enter Parfums, keep in mind that when we refer to our European based operations, we are talking about our 72% owned French subsidiary called Inter Parfins SA. And when we refer to our U. S.-based operations, we are talking about our wholly owned domestic subsidiaries. So 2023 already has the hallmarks of another spectacular year for our company.

Speaker 2

We admit that some of that exuberance is because of the strength in the fragrance market, but we also believe that our stellar performance is driven by the high quality operation by our talented staff every day and our ability to execute Sustainable innovation. This confluence resulted in the best quarterly sales in our history. Let's move on to our business by region. In North America, our largest market, Net sales increased by 36%. You may recall that in last year's Q1, The change in logistics software of our logistic one of our logistic operator tempered 2022 Q1 sales, But that resolved as we completed the year of 22% in North America last year.

Speaker 2

Western Europe and Asia Pacific also had a strong start to the year with sales ahead 21% And 8%, respectively. Our business in Central and South America is really gaining traction As sales rose 43%, while Eastern Europe and the Middle East grew 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 favorability On our European based operations, which grew sales in U. S.

Speaker 2

Dollars by 26% or 29% in constant currency. An interesting point about our European based operation is that Jimmy Choo brand sales exceeded those of Montblanc, Historically, our largest brand. Both brands performed exceedingly well with net sales growth of 63% For Jimmy Choo, 28% for Mont Blanc. Our 3rd largest brand Coach also had a great start to the year We've sales up 24%. During this Q1, we introduced a new Moncler collection.

Speaker 2

We introduced also a flanker for Jimmy Choo called Rose Fashion. We had also a new Innovation for Kate Spade called Sherry, Rochas launched Titrand Soleil, and we had another scent for the collection extraordinaire by Van Cleef In the Q2, we will be launching Coach Green, Montblanc Explorer Platinum, Rocha's Girl Life and in the Q1, we've got Coach Love and new entries for the Karl Lagerfeld And Van Cleef Collection. For the remainder of 2023, the pace of our product launches is expected to slow, While geographic rollout of products were diluted late in 2022 early 'twenty three are expected to continue. In our U. S.-based operations, which achieved 1st quarter sales growth of 19% On top of a tremendous growth of a 77% growth during the Q1 of 2022, As we reported last month, Guess' Fragrance sales approximated those of last year's Q1 when brand sales were 36 percent ahead of the prior year period.

Speaker 2

Additionally, while issues with the ERP implementation held back overall sales, It impacted guests disproportionately. We have received since substantial orders shipping in the 2nd quarter And new guest products, including Uomo Aqua, Bella Paradiso and the guest originals trio And we'll be in the second, third and fourth quarters respectively. 1st quarter product launches for U. S.-based operations were primarily Primarily focused on brand extension. For example, we launched Authentic Sell for Abercrombie, Canyon Sky for Hollister, Ali Bais for Oscar Larenta and Signorina Libera for Ferragamo.

Speaker 2

For the balance of the year, we have an extensive innovation program Under the widely recognized DKNY and Donna Karan brands. As we said on our year end conference call, The combination of Donacara and NDKNY franchises is destined to be our 2nd largest brand within our U. S.-based operation. We also have brand extensions for MCM, Anna Sui and GUESS, as well as offers for Ferragamo and Abert Congol, Plus a brand new major launch of an entirely new line for Hollister. Yesterday evening, in conjunction with our earnings release, we announced our agreement with Abert Combi to distribute its Number 1 men's fragrance called Fierce in selective markets.

Speaker 2

The first phase of the agreement, which becomes effective on September 1, 2020 3 covers fierce 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 Fierce family of products. Our relationship with Abercrombie began in 2014, and we have brought to market several major blockbuster Pillars, including 1st in Sync, Away and Authentic. With close to a decade under our belt, We have earned Abercrombie's and Fitch confidence as evidenced by this agreement and trusting us to distribute the iconic Fierce collection On a test basis for 3 years, our plans call for growing penetration in existing fierce market That includes department stores, specialty stores and duty free stores as well as online sales while exploring opportunities Moving on to a notable topic across our industry, Our sales in China in the Q1 were, as expected, underwhelming. About 3 weeks ago, I traveled to several cities in China, visiting stores, distributors and staff.

Speaker 2

Following the lift of lockdowns, We continue to see business is improving, but at a slower pace than people expected. The one exception is the duty free market of Hainan, which I visited also, where business is booming. Chinese consumers are pouring in and are buying beauty products. It is not a secret that the emphasis is And has historically been on skin care, but fragrance is growing faster. From what I could see, our Anna Sui, MCM, Van Cleef and Arpels products are doing very well there, and we suspect that fragrance product as a whole will become more and more relevant.

Speaker 2

The fragrance opportunity in China is still very big. However, the timing of a real breakout is much less That said, the business is moving in the right direction. The younger generation of Chinese consumers Are living through changing cultural customs and are not only trying, but loving fragrances, more so prestige than mass, While looking to express themselves through fragrance, fashion and accessories, we are seeing a preference Into more exclusive niche fragrances at a higher retail cost. In an effort to address their demands, We are customizing our merchandising. For example, with Graff 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 relevancy.

Speaker 2

As always, we will share additional information on future calls as we gain visibility on China. The other notable topic is supply chain. To sum it up, it is better but far from ideal. Pumps and glass components remain in short supply. And as we have said for nearly 2 years, We are sourcing in multiple locations, ordering more and further in advance of our expected needs.

Speaker 2

As good as the Q1 was, inventory shortfalls only permitted us to ship about 80% of orders For European based operation and 70% of orders for our U. S.-based operation. One other question that keeps coming up is why we are not pursuing the newer artisanal fragrance brands. The answer is probably for the same reason we steered clear of a celebrity fragrance obsession. It is just not our lane.

Speaker 2

We really know and like the Prestige Fragrance business, which accounts for most fragrances. 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 a recent article in one of the Beauty Trade Magazine, Macy's VP of Fragrance Noted that our position gives us agility in product innovation and data driven marketing tactics. Additionally, she mentioned our focus on storytelling and animation, which we continue to believe It's one of our competitive advantages in the industry. We remain true to our stated goal of always seeking out new licenses Before turning the call over to Michel, I would like to mention that we are moving up the ranks in the beauty industry According to Women's Wear Daily, in its 2022 Beauty Top 100 article, we ranked number 33, up from 40 1 year earlier, as a pure play fragrance manufacturer up against larger companies that have additional beauty segments Such as cosmetics, skin care or hair care, we are very pleased and very honored. So now, we'll turn it over to Michel To review our financial performance, Michel?

Speaker 3

Thank you, Jean, and good morning, everyone. We issued our consolidated earnings release and 10 Q filing yesterday evening. I encourage you to review them on our company website. And while the provided materials and Jean's remarks covered a lot of ground with respect to our Q1 results, there are a few points I believe are notable. So first, we say this pretty much every time, over 50% of our net sales in our European based operations are denominated in U.

Speaker 3

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 Q1 of 2023, the sizable gap in the euro dollar versus the prior year period has narrowed from $1.12 to $1.07 And there was only a negative 2% foreign exchange impact on the Q1 sales. By comparison, in the final quarter of 2022, There was a negative 10% foreign exchange impact versus the prior year's Q4 with the euro dollar going from 1.14 So it's normalizing and we're starting to see pretty much some of these strange FX impacts Having less of an impact and we hope to see that going forward.

Speaker 3

Now moving on to gross margins. Overall, we expanded gross margins by 180 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 is only marginally countered by higher cost of goods because of the age of associated inventory and FIFO accounting. We expect this benefit to partially phase out in quarter 2, but mostly in the back half of the year.

Speaker 3

For European based operations, the Convergence of pricing actions and growing sales in the U. S. Where we control distribution and book wholesale 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 through a favorable brand and channel mix with better pricing And to generate a long term competitive advantage.

Speaker 3

Another sustainable driver of gross margin input is building scale, which enables us to absorb 16%, significantly lower than our sales growth of 24%. From a percentage of sales perspective, SG and A improved by 2 70 basis points from the prior period to 36.1%. For European based operations, SG and A expenses increased 12%, representing 33.6% of net sales compared to 37.9% 1 year earlier. For U. S.-based operations, SG and A expenses increased 24%, representing 43.4% of net sales Compared to 41.5% in the same period last year.

Speaker 3

For both European and U. S.-based operations, increased spending on promotion and advertising We're primary drivers of the increase. Specifically, for U. S. Based operations, we've also made additional talent and infrastructure investments To support both new licenses and the growth of established brands.

Speaker 3

This was something we already touched on at the end of the last quarterly call. This represents an increase of approximately $4,000,000 of additional expenses to SG and A compared to the Q1 of 2022. With a 24% increase in 1st quarter net sales, our promotion and advertising expenses only increased 3 And comprised 11.3 percent of net sales versus 13.6% in last year's Q1. It's worth noting that our pre pandemic Q1 2019 promotion and advertising spend was 15 point 4% of net sales in 2019. If we had a crystal ball, we would have had significantly higher spend on promotion And advertising, but as many industry experts have shared, current visibility remains unpredictable, and we continue to see market growth upside.

Speaker 3

As you've heard us say before, our goal is to spend 21% of net sales on promotion and advertising on an annualized basis, With the Q4 historically reporting the largest expense quarter of the year. Other income and expense Added $2,300,000 or about $0.04 per share to the bottom line. Interest and investment income, net of interest expense added about 3,000,000 to other income compared to a loss of $2,400,000 in the prior year period. However, we went from recognizing the gain of $2,200,000 of foreign currency In the prior year's Q1 to a loss of $800,000 in the current Q1. Net income attributable to non controlling interest rose 50 8% or nearly $6,000,000 in the quarter, which was primarily driven by the rapid growth and increased profitability of our European based operations, of which we only own 70 Finally, our effective income tax rate was 23% in the current quarter, down 100 basis points when compared to last year's Q1 period.

Speaker 3

As mentioned in the earnings release, we closed the Q1 with a working capital of $489,000,000 Including about $238,000,000 in cash and cash equivalents and short term investments, bringing our working capital ratio to 2.4:one. Our long term debt totaled $145,000,000 at March 31, and it's primarily due to the Interparfana SE headquarter acquisition, which was financed by a $10,000,000 $130,000,000 loan at an effective fixed rate of about 1.1%. I'd like to share a few remaining points. While our working capital requirements continue to increase, they continue to remain below our sales growth. Accounts receivables were up 22% from December 31, 2022.

Speaker 2

We are

Speaker 3

getting paid faster With sales outstanding at 69 days versus 75 days in last year's Q1. From a cash flow perspective, inventory levels increased 10% December 31, but that's also in line with our sales growth. We have previously mentioned that we are continuing to experience Block jams and procuring 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 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.

Speaker 3

On our last conference call, I stated that the growth rate we envisioned for net sales should exceed that of earnings, and this is the primary attributable to our commitment to the 21% of net sales Invested in promotion and advertising. While 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. Our belief stems from the expectancy of a slowdown on foreign exchange favorability, Diminishing the gross margin tailwind we experienced last year. Additionally, our price increases are expected to be offset by higher cost of sold.

Speaker 3

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 Q1 of 2023, we initiated a small share repurchase program. Over the course of Q1 of 2023, we repurchased 43,000 shares at a cost of $5,600,000 These shares are classified as treasury shares on our balance sheet. The company continues to plan to repurchase shares throughout 2023.

Speaker 3

Before moving on to your questions, I'd like to mention that I will be participating in 2 investor conferences next month, Oppenheimer's 23rd Annual Consumer Growth and Conference Virtual Conference on June 13 14 and the Jefferies Conference Consumer Conference live in Nantucket on June 20 21. I look forward to seeing interested parties there. With that, operator, please open the line for questions.

Operator

Thank you. We will now be conducting a question and answer session. Our first questions come from the line of Linda Bolton Weiser with D. A. Davidson.

Operator

Please proceed with your questions.

Speaker 4

Yes, hi. Congratulations on such a strong quarter. So it's interesting to hear about your expanded relationship with Abercrombie. I'm a little curious why The adding of the distribution of the Fierce brand wouldn't add to your EPS for the year, to your earnings. So Do you expect that to be accretive to earnings when you start doing that later in the year?

Speaker 2

I don't know, did I say that it will not be accretive to earnings? If I said that, I know it's a mistake. Yes, it will definitely we're going to make we're going to this business of Firth will be a very profitable business.

Speaker 3

Yes. So Linda, as you know, we did take our guidance off of the we were ready to announce this partnership Already a few weeks ago, we were just kind of tightening up the communication. So yes, this is built into our guidance at this point in time. And yes, it is accretive to our business.

Speaker 4

Okay, great. And then, with regard to Hainan, Jean, your comments were very interesting. SA Water said that they felt that there was some shifting of interest consumer interest toward other luxury goods like For handbags and things like that, did you sense that at all? And what is your exposure in Hainan? Do you Like do you sell a lot in Hainan?

Speaker 4

And are there particular brands that you have that are strong there?

Speaker 2

So I'm not going it's difficult for me to comment on comments of Estee Lauder, which is a company I respect a lot. What I saw in Henan is a huge, huge shopping malls Full of people buying that's true not only fragrance, cosmetics, but also leather goods, Closing, etcetera. What I but you remember, we said at the end of last year But we're going to have to be very prudent on the opening of China because we think that it's going to take A little bit more time than what people think and rightfully so, I think that there was a lot of inventory. There is a lot of people buying, so it's a good sign. Not as much as what maybe people can think, but There is no problems in Hainan.

Speaker 2

Hainan is there to stay. They are going to build even more Selling space. So I don't see a mid term, long term, I don't see any problems. It's just a timing thing. But we think that our Q2 will be better.

Speaker 2

Q1 will definitely improve. But for me, It's a slowly it's slower than expected. How is our business? I think our business is not big enough in It could be bigger. I'm in Singapore right now talking at the conference On travel retail and I'm meeting also a lot of operators for travel retail.

Speaker 2

The good news is that Henan is Turing, a lot, a lot of travel retail of Chinese that we are traveling before in Korea. So the business in Korea is affected Negatively, but the business in China is positively affected. Overall, I'm quite optimistic.

Operator

Thank you. Our next questions come from the line of Ashley Helgans with Jefferies. Please proceed with your questions.

Speaker 5

Hi, this is Sydney on for Ashley. A couple from us. So first one, just again kind of on the We've heard from some competitors on the inventory situation in China and travel retail. Any further color you can kind of give from what you're From your vantage point there. And then the second question was just on have you seen any shift in trend towards Maybe smaller form factors, kind of the mini or rollerball size of fragrances as consumers maybe trade down or just own more SKUs?

Speaker 5

Thank you.

Speaker 2

Inventory, the thing is for companies that are Over developed in the travel retail, which is great, like Mr. Laudert, L'Oreal. Of course, the recovery is not fast enough. But for us, unfortunately, Travel Retail is at the rate today is at 5%. We want to grow it 7% or 8%, so we still have room.

Speaker 2

And again, because we are prudent in our guidance, We took that into account. And if there is a faster improvement, we'll, of course, That's for the first part. Regarding the second part of your question, I do not see at all A trend on smaller size or less expensive products. On the contrary, I see a premiumization, I don't know if it's English, of products. I see people buying more expensive products, larger sizes, More concentrated products and this is a trend not only in Asia, but also in the U.

Speaker 2

S. And in Europe. That's what I can see for now.

Speaker 1

Thank you.

Operator

Thank you. Our next questions come from the line of Corrine Wolfmeyer with Piper Sandler. Please proceed with your questions.

Speaker 5

Hey, good morning and congrats on the quarter and thanks for taking the questions. So first, I'd like to just kind of dive into the updated Guidance for the year, I mean, it seems like you raised by about the beat, maybe slightly a little bit more. But I do know some of us were hoping for maybe a little bit more improvement in that EPS number. Can you just talk about maybe why we're not seeing as much growth there? I know We are seeing some higher investments in marketing and some pressures on the gross margin line, but anything beyond that to call out of why we Maybe aren't seeing as much upside in that bottom line earnings number?

Speaker 3

Yes. Maybe I'll take that, John. Yes. So I mean, really, it's the math, right? I mean, if you look at the building blocks, I think The gross margin expansion that we've seen over the last few quarters has been in large part driven by pricing.

Speaker 3

It's also been driven By foreign exchange, we're starting to see that trend kind of move in the slightly opposite direction. And as I explained also in the prepared remarks, What we're seeing very clearly as well as we use FIFO accounting. So first in, first out, a lot of the stuff that we're selling right now, We have close to 9 months of inventory, our things that we bought last year. So as we now So we're seeing the sales uplift coming from higher pricing, which just has an immediate effect, but the costs aren't really necessarily making their way So we do expect gross margins to start being more impacted in the back half of the year. We also already see a small effect Most probably in quarter 2.

Speaker 3

So that's really the big block. And then the second one is really the A and P. I mean, we've said this a couple of times. We like to plan our financial planning in a prudent way. We plan our spending based on certain assumptions in In terms of market growth, we continue to see upside surprise.

Speaker 3

The good news is everybody is seeing that upside surprise, not So we don't feel we're being uncompetitive in the market. But it is something that we need to be Closely watching for it and we are looking to get to that 21% margin. So that is I'd say those are the 2 real main building blocks of why you're seeing more prudent EPS Gerald, for the balance of the year. I mean, it's still a pretty nice number. We're looking at 15% top line, 12% EPS.

Speaker 3

So I think it's Nothing to be ashamed about, especially in the current context.

Speaker 5

Yes, definitely. That's super helpful. And then can you just touch A little bit more on the increased marketing spend this year. What does that look like? What kind of initiatives are you putting in place?

Speaker 5

And then As we think about kind of like the ROI on these investments, what kind of return are you baking into your internal expectations with this increased marketing spend? Thanks.

Speaker 3

Jean, you want to take the question on the marketing expense?

Speaker 2

For me, the marketing you mentioned Couple of times that you want this to be at 21%, right, on an average for the year, Michel, that's what you said?

Speaker 3

That's right, Sean. So I think there's a question on what we're investing our marketing on, if I understand correctly, Karen, Karen's question.

Speaker 2

You can answer, Michel. Go ahead.

Speaker 3

Yes. I mean, typically, I mean, we've all seen the shift, right? The shift has gone from The shift of marketing expense has gone from the traditional media to more of the social media. So we have a very active Campaign on active campaigns on social media, all the things that you I think everybody is very familiar with, whether it's TikTok, Instagram, Facebook, all of these things. We're really our goal is to really communicate We're the shoppers and the consumers are basically interested in building our brands when we do that in partnership with the fashion houses.

Speaker 3

So that's the first place and obviously we continue to invest in store. The store is an important Point of where people make purchase decisions and you want to make sure your brands look good Competitive when they're in the store and they have to make that decision. In terms of ROI, I think it's really the traditional question around You know, do you have does your media pay out? I think people always say, We know media works. We just don't know which part doesn't work, right?

Speaker 3

But overall, we do know is that when you build brands and you invest behind the brands and their new visorability, What are the key business drivers that will drive the brand equity? And those are typically the levers that we follow. And of course, We make sure that while we're investing, either we're getting the best return for our money, either short term or long term. So yes, of course, we look at ROI.

Speaker 5

Very helpful. Thank you.

Operator

Thank you. Our next question comes from the line of Prahlad Khorsand with BWS Financial. Please proceed with your questions. Hi. Just a follow-up on the ad spend.

Operator

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 you're looking for?

Speaker 3

No, I mean, the reality is, I think if you look at our brands, our largest brands are roughly in the 200,000,000 There are significantly larger brands out there that spend significantly more. I think at the end of the day, there is a correlation between Share and share of spend, and as long as you're investing in the right vehicles, over time, there There's some gradual growth that can happen there. So no, I don't think we feel that, that would be the case. But I do again insist on the fact that Under investing over a sustained period will result in us not delivering the growth that we want, right? So this is why we are Very keen to invest and to continue to invest.

Speaker 3

And I think again, the only thing that's helped us so far is that this has been pretty much across the Everybody has been surprised by the market growth. So everybody has relatively been under investing in A and P. So our share of investments Hasn't come down, but I know we're keeping a very close eye on that, making sure that We're staying as much of a rest to what the market is doing as possible and anticipate that and anticipate what the spending, because otherwise it's a big missed opportunity for us. Our focus remains top line growth.

Operator

Got it. And then my other question was just given the shortfall in sales this past quarter, How are you doing as far as getting the pumps and the glass that you need and fulfilling the Q2 and Q3 orders as they come in?

Speaker 3

So I think there are a couple of things, right?

Speaker 2

Michel, if I may. When you say shortfall, first, we have published a record of the Q1. So but it's true that we could have done more if we had all the components for our inventory, just Just to put things in perspective, so we have made some improvement in In the supply chain by plans that we started a couple of years ago, which is Diversify the sourcing, especially on glass. So today, for bottles, we have More than one supplier per type of bottle. So we are today in a much better position Than before.

Speaker 2

But still, the growth was unexpectedly Higher than anticipated. And that's why in Europe, we shipped around 80% of our orders and in the U. S. 70%. It doesn't mean that these orders are lost.

Speaker 2

It means that we'll see them later on in the quarter. Michel, you wanted to add something?

Speaker 3

Yes, yes. Just to build on Jean exactly, I was going to make that comment, which was that if you miss a case that doesn't necessarily mean you have Loss consumption, there's inventory in the trade, there's inventory with our distributors. And so it's not going to result And lost consumption, it's something that we expect to make

Operator

up. Okay, great. Thank you.

Speaker 2

Thank you. Thank you. There are

Operator

no further questions at this time. I would now like to hand the call back to Michel Lapwood for

Speaker 3

any closing remarks. Thank you, Daryl. Thank you all for tuning in for our conference call. If you have any further questions, please contact Karen Neely Thank you again for your time and Looking forward to meeting some of you in the upcoming conferences in June.

Operator

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

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Inter Parfums Q1 2023
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