Inter Parfums, inc (IPAR) Q2 2021 Earnings Call Transcript

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Inter Parfums, inc (IPAR 1.31%)
Q2 2021 Earnings Call
Aug 10, 2021, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the Inter Parfums Second Quarter 2021 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. [Operator Instructions] Please note that this conference is being recorded.

I will now turn the call over to Russell Greenberg, Executive Vice President and Chief Financial Officer of Inter Parfums. Mr. Greenberg, you may begin.

Russell Greenberg -- Executive Vice President and Chief Financial Officer

Thank you very much, operator. Good morning, and welcome to our 2021 mid-year conference call. As always, 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 for the year ended December 31st, 2020 and other 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%-owned French subsidiary, Interparfums SA. 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.

Of note, the average dollar/euro exchange rate for the 2021 second quarter was 1.2 compared to 1.1 and 1.12 in the second quarters of 2020 and 2019, respectively. As you know, a weaker dollar versus the euro has a favorable impact on our net sales, while gross margins are negatively affected, and that is because more than 50% of net sales of our European operations are actually denominated in U.S. dollars while almost all of their costs are incurred in euro.

I also don't have to remind listeners that last year's second quarter much of the world closed down due to the treacherous days of the COVID-19 pandemic. Our sales nearly ground to a halt and we recorded the first-ever quarterly loss in our 33 years as a public company. What a difference a year makes.

When we announced initial 2021 guidance last November, our visibility was minimal. Since then, with the benefit of time, we have raised annual guidance twice. Today, COVID-19 and its variants, the distribution and acceptance of vaccines and the wide range of change in regulation in various jurisdictions, continue to make projections extremely challenging.

Moving on to today's business. 2021 second quarter sales were far better than our best expectations and the operating leverage that resulted was as good as it gets. In the news release we issued yesterday, we focused on the comparison between the 2021 second quarter and first half with the same periods in 2019. We will continue with that format during this call.

Second quarter 2021 sales of $207.6 million were 25% ahead of $166.2 million in the second quarter of 2019. Through the first half, our sales are running nearly 18% ahead of 2019's first half, with sales by European operations up 19% and U.S. operations up by just over 13%.

For U.S. operations, second quarter gross margin rose to 53% from 52% in that same period in 2019. The decline in the dollar versus the euro contributed to a slight decline in the gross profit margin for European operations, which came in at 67% compared to 68% in that second quarter of 2019.

SG&A expense was 42% and 40% of net sales for the three and the six months ended June 30, 2021, and that compares to 51% and 47%, respectively, in those same periods from 2019. European operations' SG&A expenses represented 44% of net sales compared to 54% in 2019 and for U.S. operations, SG&A expenses represented 36% of net sales in '21 compared to 40% in 2019.

After a hiring freeze in 2020, we made several new hires this year and business travel has resumed somewhat. But overall, our administrative expenses have not risen in proportion to the topline growth. 2021 second quarter promotion and advertising, which is -- that is included in SG&A, was $33.2 million or only 16% of net sales. By way of comparison, in the second quarter of 2019, promotion and advertising expenses was $36.4 million or 22% of net sales. For the year as a whole, we continue to expect promotional advertising expenses to approach historic levels of 21% of net sales on a full-year basis, which based upon our current sales guidance would be around $157 million in total, implying that we have another approximately $100 million to spend in the second half.

Thus far, inflation did not have a significant impact on our operating results, pricing, costs, budget or outlook. This has begun to change in Q3, especially with transportation costs, and we will be monitoring these effects very, very closely.

Our second quarter operating margin came in at 22% compared to 14% in the same period in 2019. And for the first half, our operating margin was 23% versus 16% in the first half of 2019.

We closed the second quarter with working capital of $462 million, including approximately $298 million in cash, cash equivalents and short-term investments, and a working capital ratio of over 3:1. The $133 million of long-term debt relates to our Paris headquarters acquisition, which was financed by a 10-year EUR120 million bank loan. Approximately, EUR80 million of this variable rate debt was swapped for fixed rate debt. Cash provided by operating activities aggregated $38.1 million for the six months ended June 30, 2021.

As we have reported last month and affirmed yesterday, we raised our 2021 sales guidance to approximately $750 million, resulting in diluted EPS of $1.95. Our guidance assumes the average dollar/euro exchange rate remains at current levels and that there is no significant resurgence in the COVID-19 pandemic. Once the Ferragamo deal closes, we will revisit the subject of guidance and make adjustments based upon pending orders and inventory levels.

Now, I will turn the call over to Jean.

Jean Madar -- Chairman and Chief Executive Officer

Thank you, Russ, and good morning, everyone. Our message today can be summed up in three sentences; business is booming, demand is very strong and virtually all our brands are outperforming what we budgeted at the beginning of the year. So, let me move into details. Through the first half of 2021, sales in our largest market, North America, rose 59% as compared to 2019. That is huge.

Sales in Western Europe and Asia were relatively flat with the first half of 2019 and it's pretty good. Sales in two of our smaller markets, Eastern Europe and Central and South America, were ahead 54% and 10%, respectively, over[Phonetic] first half of 2019, while sales in the Middle East declined 22%.

Our four largest brands are running ahead of 2019, as Montblanc, Jimmy Choo, Coach and GUESS rose 3% for Montblanc, 39% for Jimmy Choo, 34% for Coach and 58% for GUESS, compared to the first half of 2019. You may recall that we launched Explorer for Montblanc in 2019 and hence have a less dramatic comparison.

Although international travel is slowly resuming, the impact on our travel retail duty-free business is barely noticeable. Pre-pandemic, this business historically represented around 15% of our net sales. That said, online sales have been quite good. Just a reminder, we do not directly conduct e-commerce with consumers, but our products are sold across multiple internet platforms, our products are sold through the websites of department stores and specialty stores, maybe online sites like Tmall and Amazon and the websites of our licensors.

On the related subject, Origines-parfums, in which we acquired a minority interest effective July 2020, has been doing quite well with strong sales growth. But because it's a minority interest, its sales are not consolidated.

Of course, the big news of the last month is Ferragamo. We are delighted to welcome Ferragamo to our portfolio of fragrance brands, which will officially happen in October 1. Ferragamo has been a timeless, classic luxury brand for generations of quality-driven consumers. With its origins dating to the early '70s -- 1970s, Ferragamo Parfum encompasses a large and exquisite suite of men's and women's fragrance, but are produced in Italy and distributed worldwide.

From our work studying the brand's potential, we are confident that the expertise we bring to product development, the packaging, the advertising, marketing and distribution will elevate the brand's fragrance profile along with sales, especially in the brand's largest markets, which is China and North America, where we have established a very strong presence.

We are purchasing the assets of the business into the inventory, tools, molds, which are falling into our wholly owned Italian subsidiary, which we will manage, operate and grow in Florence, Italy. We are also taking on Ferragamo's obligations, including employment agreements and contractual agreements with suppliers and distributors. In conjunction with the acquisition agreement at closing, we will sign a 10-year exclusive worldwide license agreement with a five-year optional extension with the Salvatore Ferragamo Group, with of course royalty and minimum advertising requirements as are customary in the industry.

Our plan calls for both legacy and new fragrance products to continue to be produced in Italy, and we have targeted 2023 for our first new product launch for the brand. The Salvatore Ferragamo Group has entrusted Inter Parfums as its fragrance partner because of the success we have enjoyed revising fragrance brands that have not lived up to their potential. We have made the commitment to the Ferragamo Group to devote the attention and resources necessary to grow [Technical Issues] the Ferragamo fragrance business within the selective luxury distribution framework that we have established within our global distribution network.

But we're not done yet. Growing our brand portfolio remains a high priority with a focus on names which have a reasonably large established fragrance business and those owners believe their fragrance brand is underserved by their current licensee. We have been very successful taking on the challenge of taking over the fragrance brands that were not living up to their potential and reinvigorating their sales.

I want to use this opportunity to acknowledge our suppliers throughout the world. Our relationships with them were cemented during the pandemic, and that was among the reasons why we were able to maintain sufficient inventory of finished goods and components to fulfill the sales in [Indecipherable]. Supply chain challenges have been more prevalent in recent weeks as everybody knows, but we have been here before and have always been able to maneuver through and resolve these issues.

Before taking your questions, we want to share some dates with you Inter Parfums will participate in a number of virtual investor conferences, including the Citi Mid-Cap Consumer Conference on September 29, and Citi Global Consumer Conference, which runs from December 7 to December 9. We will also present at the Jefferies West Coast Consumer Conference, November 16 and November 17. And also, we are planning to once again host our Annual Meeting of Shareholders virtually on Tuesday, October 5th, at 10:00 AM. We look forward to reporting on our progress as the year unfolds.

So it's 11:20, and operator, we can open the floor to questions.

Questions and Answers:

Operator

Thank you. And at this time, we will be conducting our question-and-answer session. [Operator Instructions] Our first question comes Linda Bolton Weiser with D.A. Davidson. Please go ahead with your question.

Linda Bolton Weiser -- D.A. Davidson -- Analyst

Yes. Hello, how are you?

Russell Greenberg -- Executive Vice President and Chief Financial Officer

All good, Linda.

Jean Madar -- Chairman and Chief Executive Officer

Good. Thank you.

Linda Bolton Weiser -- D.A. Davidson -- Analyst

Good. That's good. So, I was just curious about, Russ, your comments on gross margin. I mean you compared it to the second quarter of '19, but actually if you look at it just like compared to the first quarter of '21, it actually went up sequentially. So I'm just curious why that is, because the euro comparison is actually unfavorable in the second quarter. So, why was the gross margin even higher in the second quarter than the first quarter, can you just give a little more color on that?

Russell Greenberg -- Executive Vice President and Chief Financial Officer

Certainly, Linda. A lot of it -- it was actually up for both the three- and the six-month period. And much of that is due to the increase in the sales and us being able to leverage some of the fixed costs that are included in the gross margin. As you know, certain depreciation of tools and molds, especially here in the United States, that's more of a fixed expense that is included in the gross margin so that when sales are higher, you'd better able to leverage those types of expenses.

In addition, and this goes more for the European operations, the number and percentage of giftsets that are sold during the course of the quarter in 2021 were -- as a percentage of total sales, were much less than that of 2020. And that also attributed to the increase in the sales in the gross margin during that period.

Linda Bolton Weiser -- D.A. Davidson -- Analyst

Okay. Thank you. And then, can you just give a little bit more color on the Ferragamo license, like maybe the long-term potential of that brand? I mean, I know it has existing sales. Can you give us a size perhaps of the annual revenue currently? And then how do you see it sizing up versus some of your other franchises?

Jean Madar -- Chairman and Chief Executive Officer

Yes. Russ, you want to try to answer?

Russell Greenberg -- Executive Vice President and Chief Financial Officer

Yeah. The Ferragamo fragrance business was in the high-double digits for many, many years and Ferragamo was publicly traded, so a lot of this information is really available online and you can see it for yourself. We really have not gone out and publicly disclosed their numbers, and I really don't want to. But needless to say, the fragrance sales, as a result of the COVID-19 pandemic, were impacted severely during the course of the last year -- two years.

So, our goal is really to be able to reinvigorate and bring back Ferragamo to the levels that it has seen for the last 10 years, 15 years, and that's really where the goal is. I don't really want to enumerate and put specific dollar figures out there, but there's probably enough information in the public domain that you could probably research and find it for yourself. Jean, do you agree on that?

Jean Madar -- Chairman and Chief Executive Officer

Yeah. The information is public, so [Technical Issues]. But we know Ferragamo for a while, the fragrance were run internally by the fashion house. But we met again during the pandemic and Ferragamo management decided to really look at our proposal of the licensee because it was difficult for them to fight alone in this environment. So, by joining our portfolio, Ferragamo is much stronger, Ferragamo will benefit from the strength of our brands, from over other brands, from the strength of our distribution.

We have big plans for Ferragamo. There is an existing business that is absolutely fine and the idea will be to launch for new product in 2023 with all the strong elements of the brand. The brand is known, we don't have any issues with the perception of the brand. We just need to reestablish them as a top luxury fragrance in the market. We think it's totally achievable and we give ourselves two years to three years to be back at the level that we were pre-COVID.

Linda Bolton Weiser -- D.A. Davidson -- Analyst

Okay. Thank you.

Jean Madar -- Chairman and Chief Executive Officer

Thank you.

Russell Greenberg -- Executive Vice President and Chief Financial Officer

Thank you.

Jean Madar -- Chairman and Chief Executive Officer

Thank you, Linda.

Linda Bolton Weiser -- D.A. Davidson -- Analyst

And then, can I just...

Jean Madar -- Chairman and Chief Executive Officer

Yeah. Go ahead.

Linda Bolton Weiser -- D.A. Davidson -- Analyst

Can I ask you one more thing?

Jean Madar -- Chairman and Chief Executive Officer

Of course.

Linda Bolton Weiser -- D.A. Davidson -- Analyst

Yeah. Can I just -- yeah, you mentioned cost inflation that is kind of changing and becoming a little bit more so in the third quarter. Are you including in your guidance specifically any margin pressure from increased costs? Or are you hoping to offset? Or what is exactly included in your guidance?

Russell Greenberg -- Executive Vice President and Chief Financial Officer

Yeah...

Jean Madar -- Chairman and Chief Executive Officer

In the guidance we have -- I am sorry. In the guidance we have, of course we look at our costs and that's true with the second part of our cost of goods are going up. Like Russ mentioned, the freight worldwide is going up, so our freighting is up. So, our cost of bringing components and moving components worldwide is up. But we have also major challenge on the supply, so we have to accept certain price increase. All this is already taken into account in our new forecast -- in our new guidance. Russ?

Russell Greenberg -- Executive Vice President and Chief Financial Officer

Yes. So, that's exactly what I was going to say. When we issued the -- and revised our guidance most recently, when we announced sales back, I think it was the 19th, this new guidance definitely includes the effects of the some of the supply chain issues that we are seeing. The sales were prepared on a relatively conservative basis to take that into consideration.

From a margin standpoint, we've absolutely incorporated some of the additional transportation costs that we have seen. That was -- that's really the biggest inflation area that we are faced with at the current time. Transportation costs are up, in some cases 200% to 300%. So, moving components from country to country, we are taking a deep dive and looking at what we can do in order to get around some of those increases. But as far as the numbers that we've projected for the remainder of the year, we've definitely taken into consideration the lion's share of the potential effects.

Linda Bolton Weiser -- D.A. Davidson -- Analyst

Okay. Thank you so much. I appreciate it.

Russell Greenberg -- Executive Vice President and Chief Financial Officer

Thank you, Linda.

Jean Madar -- Chairman and Chief Executive Officer

Thank you.

Operator

Our next question comes from Steph Wissink with Jefferies. Please state your question.

Steph Wissink -- Jefferies -- Analyst

Thank you. Good morning, everyone. I also have a few questions, if we could. Russ, this one is for you on marketing. Just wondering if you can help us think through the cadence in the second semester. Is there a waiting by quarter Q3, Q4? Or how do you want to kind of model A&P for the back half?

Russell Greenberg -- Executive Vice President and Chief Financial Officer

Yeah, certainly. Based upon what we see from the sales trends, Q3 and Q4 from a sales standpoint will probably be relatively closer together than they have in the past. But from an advertising standpoint, our advertising expenditures are always much more concentrated in Q4 than in Q3.

In addition, we have an initial, call it, a small exclusive pre-launch for Moncler coming up in the fourth quarter. And in anticipation of the 2022 launch for Moncler, we know that we've already allocated certain dollars of marketing spend that we're probably going to put into the marketplace in Q4 into kind of advance and in anticipation of the 2022 launch of the new Moncler fragrance. So, I would definitely say that things are going to be much more concentrated in Q4 than Q3.

Steph Wissink -- Jefferies -- Analyst

All right. Very helpful. And then my second question is just in relation to Linda's question on costs. Do you have any plans to raise price? And if you do, what's the process to raise like-for-like price on your product in the market already? Do you have to give retailers notice how quickly can you implement? What should we be thinking about for pricing?

Jean Madar -- Chairman and Chief Executive Officer

Yes, we have not raised prices for more than three years, but we have decided to increase prices. We gave notice to most of our customers on August 1, so this was not a long time ago, that we will have certain price increase on January 1. The reception was quite accepted because we don't do this often and it seems that all our competitors have -- are doing it. So, we didn't see any issues with that. Price increase that we are talking about is anywhere from 2% to 4%.

Steph Wissink -- Jefferies -- Analyst

Very helpful. And my last one and maybe, Jean, this is for you. It's bigger picture thinking about how consumers are engaging in the category. It's just really been so impressive year-to-date. Has there been any change by channel or by specific distribution point where you're seeing consumer behavior coming back out of the backside of COVID, maybe turning up a little bit differently in different destinations than you would have expected?

Jean Madar -- Chairman and Chief Executive Officer

Not really. Not really. I don't see any changes. The online business continued to be strong with department stores, and specialty and perfumery business is also good. The business is good really on all the channels. But what we see is quite impressive because we are receiving orders today that we cannot fulfil because we are way, way above our forecast.

So, we ship the stores only the quantities that we -- that they can sell in the next month or two. Nobody -- definitely, nobody has a lot of inventory. Actually, some stores are complaining because they would like to have more inventory. We are in a -- honestly, we are in a very good position. The inventories at stores is moving very, very fast. We are shipping on a daily basis some store, weekly basis some stores. The products move very fast. We have not seen this for a long time. I don't remember in the last five years of seeing such a stronger demand across our brands.

Steph Wissink -- Jefferies -- Analyst

Very helpful as always. Thank you, gentlemen.

Russell Greenberg -- Executive Vice President and Chief Financial Officer

Thank you.

Jean Madar -- Chairman and Chief Executive Officer

Thank you.

Operator

Our next question comes from Hamed Khorsand with BWS Financial. Please state your question.

Hamed Khorsand -- BWS Financial -- Analyst

Hi, just on the comment you just made about inventory. Is it -- do you think that you're picking up share or is the entire pie actually expanding faster than you think?

Jean Madar -- Chairman and Chief Executive Officer

In certain markets, in the U.S., we're definitely picking up shares because we were one of the first ones to ship, again we're one of the first ones to respend again in marketing and advertising. So, definitely we're picking market share. In Europe, it's a little bit different, it's a little bit slower because some markets are not fully open as we speak, so it's on and off. But in the U.S. and in China we are definitely taking market share.

Hamed Khorsand -- BWS Financial -- Analyst

And what do you assess as far as the duty-free stores comprising of your revenue right now? Are they back to normal for you?

Jean Madar -- Chairman and Chief Executive Officer

No. No, no, we are very, very, very far from the normal, very far. As I said in my comments, it used to represent close to 15% of our business, we are still very, very far. We've seen some strong business in China with of course Hainan. Also, we are seeing some strong business in the Korean duty-free. We have some Chinese travelers. So Korea duty-free, China duty-free is outperforming. But overall, we are way, way below our normal percentage of sales in travel retail.

Hamed Khorsand -- BWS Financial -- Analyst

And my final question was, how do you describe or assess your '22 product launch plans? Is it going to be as robust as it was this year?

Jean Madar -- Chairman and Chief Executive Officer

We have a mix of very important launches, what we call blockbuster launches, and of course, trying[Phonetic] to keep the line running. So, we have a great mix going forward. The market is really looking at all of our programs and are responding quite positively. So, all our -- the problem today is more of manufacturing and making sure to have more inventory in order to supply all the demand. But this demand was not forecasted, that's why we raised already twice our guidance.

As you know, the company is quite conservative when we give guidance. So, we'll wait until the tomorrow, I would say another month or two before we review again. But the challenge is we have the orders, we have customers, we just have to supply them. So, it's a good problem to have, and we are doing quite well.

Hamed Khorsand -- BWS Financial -- Analyst

Okay. Thank you.

Russell Greenberg -- Executive Vice President and Chief Financial Officer

Thank you, Hamed.

Jean Madar -- Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. There are no further questions at this time. I'll turn the call back to management for closing remarks.

Russell Greenberg -- Executive Vice President and Chief Financial Officer

Thank you. Thank you, thank you all for tuning into our conference call. As usual, if you do have any further questions, I can be contacted by email. Thank you once again for connecting into the call. Stay well and stay safe.

Operator

[Operator Closing Remarks]

Duration: 34 minutes

Call participants:

Russell Greenberg -- Executive Vice President and Chief Financial Officer

Jean Madar -- Chairman and Chief Executive Officer

Linda Bolton Weiser -- D.A. Davidson -- Analyst

Steph Wissink -- Jefferies -- Analyst

Hamed Khorsand -- BWS Financial -- Analyst

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