Interparfums, Inc.

Greetings and welcome to the Interparfumes first quarter 2023 conference call and webcast. At this time, all participants are in a listen-only mode. The 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 at the Equity Group and Interparfumes Investor Relations Representative, Karen Daly.

Thank you, Daryl. 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 headings forward-looking statements and risk factors in their most recent annual report on Form 10-K. Forward-looking statements speak only as of the date on which they are made, and Interparfums undertakes no obligation to update the information discussed. It's now my pleasure to turn the call over to Jean Mazar, Chairman and Chief Executive Officer of Interparfums. Jean, you may begin.

Thank you, Karen. Good morning everyone and welcome to our first quarter conference call. As in the past, I will start the discussion and then Michel Atwood, our CFO, will review our financial performance, outlook and related issues. For anyone new to Interparfums, keep in mind that when we refer to our European-based operations, we are talking about our 72% owned French subsidiary called Interparfums SA. And when we refer to our US-based operations, we are talking about our wholly owned domestic subsidiaries. 2023 already has the hallmarks of another spectacular year for our company. 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 operations 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 first quarter, a change in logistic software of one of our logistic operators tampered 2022 first quarter sales. 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, 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. 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 Montblanc. Our third largest brand coach also had a great start to the year, with sales up 24%. During this first quarter, we introduced a new Moncler collection. We introduced also a flanker for Jimmy Choo called Rose Fashion. We had also a new innovation for Kate Spade called Sherry. Rochas launched Titron Soleil. And we had another sand for the Collection Extraordinaire by Van Cleef & Arpels. In the second quarter, we will be launching Coach Green, Montblanc Explorer Platinum, Rocha's Girl Life, and in the third quarter, we've got Coach Love and new entries for the Karl Lagerfeld and Van Cleef collections. For the remainder of 2023, the pace of our product launches is expected to slow, while geographic rollout of products that debuted late in 2022 and early 2023 are expected to continue. In our US-based operations, which achieved first quarter sales growth of 19% on top of a tremendous growth of 77% growth during the first quarter of 2022, as we reported last month, gas fragrant sales approximated those of last year first quarter, when brand sales were 36% ahead of a prior year period. Additionally, while issues with the ERP implementation held back overall sales, it impacted guests disproportionately. We have received since substantial orders, shipping in the second quarter, and new guest products, including Uomo Aqua, Bella Paradiso, and the guest originals trio, unveiling in the second, third, and fourth quarters, respectively. First quarter product launches for U.S.-based operations were primarily focused on brand extension. For example, we launched Authentic Cell for Abercrombie, Canyon Sky for Hollister, Alibi for Oscar Llarenta, and Signorina Libera for Ferragamo. For the balance of the year, we have an extensive innovation program under the widely recognized DKNY and Dona Karen brands. As we said on our year-end conference call, the combination of a Donacara and NDKNY franchises is destined to be our second largest brand within our US-based operation. We also have brand extensions for MCM, Anasui and Guess, as well as offers for Ferragamo and Abercrombie, 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 Abercrombie to distribute its number one men's fragrance, Gold Fierce, in selective market. The first phase of the agreement, which becomes effective on September 1, 2023, 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 a fierce family of products. Our relationship with Abercrombie began in 2014, and we have brought to market several major blockbuster pillars, including first in sync, away, and authentic. With close to a decade under our belt, we have earned Abercrombie & Fitch confidence, as evidenced by this agreement, entrusting us to distribute the iconic first collection on a test basis for three years. Our plans call for growing penetration in existing fierce markets that include department stores, specialty stores and duty-free stores, as well as online sales while exploring opportunities in untapped markets. Moving on to a notable topic across our industry, our sales in China in the first quarter were, as expected, underwhelming. About three weeks ago, I traveled to several cities in China visiting stores, distributors, and staff. Following the lift of lockdowns, we could continue to see business is improving, but at a slower pace than people expected. The one exception is the duty-free market of Hainan, 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 & Arpels products are doing very well there and we suspect that fragrance products as a whole will become more and more relevant. The fragrance opportunity in China is still very big. However, the timing of a real breakout is much less certain. 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 prestigious 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 Graf 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. 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 two years, we are sourcing in multiple locations, ordering more and further in advance of our expected needs. As good as the first quarter was, Inventory shortfalls only permitted us to ship about 80% of orders for European-based operations and 70% of orders for our U.S.-based operations. One of the questions that keeps coming up is why we are not pursuing the newer artisanal fragrance brands. The answer is probably for the same reason we still clear of the celebrity fragrance obsession. It is just not our lane. We really know and like the prestige fragrance business, which accounts for most fragrance sales. 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 magazines, 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 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 that 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 its 2022 Beauty Top 100 article. We ranked number 33, up from 40. one 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?

Thank you, Jean, and good morning, everyone. We issued our consolidated earnings release and 10Q 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 first quarter results, there are a few points I believe are notable. So first, and 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 sizable gap in the Eurodollar 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 first quarter sales. By comparison, in the final quarter of 2022, there was a negative 10% foreign exchange impact versus the prior year's fourth quarter, with the Eurodollar going from 1.14 to 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. 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 is only marginally countered by a higher cost of goods because of the age of associated inventory and FIFO accounting. We expect this benefit to partially phase out in Q2, but mostly in the back half of the year. 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 margins. 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 China 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%. From a percentage of 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 37.9% one year earlier. For US-based operations, SG&A expenses increased 24%, representing 43.4% of net sales, compared to 41.5% in the same period last year. For both European and US-based operations, increased spending on promotion and advertising were primary drivers of the increase, Specifically, for US-based operations, we also made additional talent and infrastructure investments to support both new licenses and the growth of established brands. This was something we already touched on at the end of the 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 first quarter net sales, Our promotion and advertising expenses only increased 3% and comprised 11.3% of net sales versus 13.6% in last year's first quarter. It is worth noting that our pre-pandemic first quarter 2019 promotion and advertising spent was 15.4% 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. As you have heard us say before, our goal is to spend 21% of net sales on promotion and advertising on an annualized basis, with the fourth quarter historically recording the largest expense quarter of the year. Other incoming expense added $2.3 million, or about $0.04 per share, to the bottom line. Interest and investment income net of interest expense added about 3 million to other income compared to a loss of 2.4 million in the prior period. However, we went from recognizing the gain of 2.2 million of foreign currency in the prior year's first quarter to a loss of 800,000 in the current first quarter. Net income attributable to non-controlling interest rose 53% or nearly $6 million in the quarter which was primarily driven by the rapid growth and increased profitability of our European-based operations, of 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 period. As mentioned in the earnings release, we closed the first quarter with a working capital of $489 million. including about $238 million in cash and cash equivalents in short-term investments, bringing our working capital ratio to 2.4 to 1. Our long-term debt totaled $145 million at March 31st, and it's primarily due to the Interbar Fantasy Headquarter acquisition, which was financed by a 10-year $130 million 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. We are getting paid faster, with sales outstanding at 69 days versus 75 days in last year's first quarter. From a cash flow perspective, inventory levels increased 10% from December 31, but that's also in line with our sales growth. We have previously mentioned that we are continuing to experience logjams and procuring certain components, but we continue to believe we have relatively healthy stock of inventory and we will continue to have this strategy 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. On our last conference call, I stated that the growth rate we envisioned for net sales should exceed that of earnings, and this is primarily 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 our higher cost of sold. And 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 43,000 shares. at a cost of $5.6 million. These shares are classified as treasury shares on our balance sheet. The company continues to plan 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, OpenHiver's 23rd Annual Consumer Growth and e-commerce virtual conference on June 13th and 14th, and the Jefferies Consumer Conference Live in Nantucket on June 20th and 21st. I look forward to seeing interested parties there. With that, operator, please open the line for questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start keys. One moment, please, while we poll for your questions. Our first questions come from the line of Linda Bolton-Weiser with DA 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 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?

I don't know. Did I say that it will not be accredited to earnings? If I said that, no, it's a mistake. Yes, it will. Definitely, we're going to make this business of Fierce will be a very profitable business.

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

Okay, great. And then with regard to Hainan, John, your comments were very interesting. S.A. Waters said that they felt that there was some shifting of interest, consumer interest, toward Hainan. Other luxury goods like handbags and things like that. Did you sense that at all? And what is your exposure in Hainan? Do you sell a lot in Hainan? And are there particular brands that you have that are strong there?

It's difficult for me to comment on comments of Estée Lauder, which is a company I respect a lot. What I saw in Hainan is a huge, huge shopping mall full of people. buying, that's true, not only fragrance, cosmetics, but also leather goods, clothing, etc. But you remember we said at the end of last year that 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 problem in Hainan. 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. We think that our second quarter will be better, third quarter will definitely improve. But for me, it's slower than expected. How is our business? I think our business is not big enough in Duty Free. It could be bigger. I'm in Singapore right now talking at a conference on travel retail, and I'm meeting also a lot of operators for travel retail. The good news is that Hainan is capturing a lot, a lot of travel retail of Chinese that were traveling before in Korea. So the business in Korea is affected. but the business in China is positively affected. Overall, I'm quite optimistic.

Okay. Sounds good. Thanks. I'll pass it on.

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

Hi. This is Sydney 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 give from what you're seeing 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 are Maybe trade down or just own more SKUs. Thank you.

Inventory. The thing is, for companies that are overdeveloped in the travel retail, which is great, like Estée Lauder or L'Oréal, of course... The recovery is not fast enough. But for us, unfortunately, travel retail is at a rate today at 5%. We want to grow it to 7% or 8%. So we still have room. And again, because we are prudent in our guidance, we took that into account. And if there is a faster improvement, we will, of course, revise or review 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. 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 US and in Europe that's what that's what I can see for now thank you

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

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, you know, some of us were hoping for maybe a little bit more improvement in that EPS number. Can you just talk about, you know, maybe why we're not seeing as much growth there? And I know we are seeing some, you know, higher investments in marketing and some pressures on the gross margin line. But anything beyond that to call out of, you know, why we maybe aren't seeing as much upside in that bottom line earnings number?

Yes, maybe I'll take that, John. Yeah, thanks. Yeah, so, I mean, really, it's the map, 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. 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 is we use fee file accounting. So first in, first out, a lot of the stuff that we're selling right now, because we have close to nine months of inventory, are things that we bought last year. So we're seeing the sales uplift coming from higher pricing, which has an immediate effect. But the cons aren't really necessarily making their way through. So we do expect you know, gross margins to start being more impacted in the back half of the year, we'll also already see a small effect, most probably in quarter two. So that's really the big block. And then the second one is really the A&P. I mean, you know, we've said this a couple of times. You know, we like to plan or do our financial planning, you know, in a prudent way. We plan our spending based on a certain assumption in terms of market growth. We continue to see upside surprises. The good news is everybody is seeing that upside surprise, not just us. So we don't feel we're being uncompetitive in the market. But it is something that we need to be closely watching for. And we're looking to get to that 21% margin. So I'd say those are the two real main building blocks of why you're seeing more prudent EPS growth for the balance of the year. I mean, it's still a pretty nice number. We're looking at 15% top line, 12% EPS. So I think it's nothing to feel ashamed about, especially in the current context.

Yeah, 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? 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.

John, do you want to take the question on the marketing spend?

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

That's right, John. No, I think there's a question on what we're investing our marketing on, if I understand correctly. Karen's question.

You can answer, Michel. Go ahead.

Yeah, I mean, typically, you know, I mean, we've all seen the shift, right? You know, the shift has gone from the shift of marketing, this expense has gone from, you know, the traditional media to more of the social media. So we have a very active, you know, campaign on active campaigns on social media. all the things that I think everybody's very familiar with, whether it's TikTok, Instagram, Facebook, all of these things. Our goal is to really communicate where the shoppers and the consumers are basically interested in building our brands, and we do that in partnership with the fashion houses. So, you know, that's the first place, and obviously we continue to invest in the store. The store is an important, you know, point of where people make purchase decisions and you want to make sure your brands look good and 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 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? But overall, we do know is that when you build brands and you invest behind the brands and their desirability, we know 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 where we're investing, either we're getting the best return for our money, either short-term or long-term. So, yeah, of course, we look at ROI.

Very helpful. Thank you.

Thank you. Our next question has come from the line. It's from Ed Corson with BWS 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 you're looking for?

No, I mean, the reality is, you know, I think if you look at our brands or, you know, our largest brands are, you know, roughly in the 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, you know, share and share of spend. And as long as you're investing in the right vehicles, you know, over time, there's a there's some gradual growth that can happen there. So no, I don't think we feel that, but that would be the case. But I do want to insist on the fact that under-investing over a sustained period will result in us not delivering the growth that we want. So this is why we are very keen to invest and to continue to invest. And I think, again, the only thing that's helped us so far is that this has been pretty much across the industry. Everybody's been surprised by the market growth, and so everybody... has relatively been under investing in A&P. So our share of investment hasn't come down, but I know we're keeping a very close eye on that, making sure that we're staying as much abreast to what the market's doing as possible and trying to anticipate that and anticipate with the spending. Because otherwise it's a big missed 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 getting 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?

Michel, if I may. When you say shortfall, first, we have published, recorded the first quarter. But it's true that we could have done more if we had all the components for our inventory, just to put things in perspective. We have made some improvements in the supply chain by plans that we started a couple of years ago, which is to 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. But still, the growth was unexpectedly higher than anticipated. And that's why in Europe, we ship around 80% of our orders. And in the U.S., 70%. It doesn't mean that these orders are lost. It means that we'll ship them later on in the quarter. Michel, you wanted to add something?

Yeah, yeah. Just to build on 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. You know, there's inventory in the trade. There's inventory with our distributors. And so it's not going to result in lost consumption. 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 Atwood for any closing remarks.

Thank you, Darrell. Thank you all for tuning in for our conference call. If you have any further questions, please contact Karen Neely. from the equity group or who's our IR counsel, her telephone number and email address can be found in our earnings release. Thank you again for your time and looking forward to meeting some of you in the upcoming conferences in June.

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.