IPAR - NASDAQ

Greetings, and welcome to Interparfums Inc.'s 2024 Third Quarter Earnings Conference Call and Webcast. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. At this time, I'd like to turn the call over to Karin Daly, Vice President at the Equity Group and Interparfums Investor Relations representative. Thank you. You may begin.

Thank you, Diego, and good morning, everyone. Joining us on the call today will be Chairman and Chief Executive Officer, Jean Madar; and Chief Financial Officer, Michel Atwood. 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 its 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. As a reminder, consolidated results reflect the Company's two business segments, European-based operations through its 72% owned French subsidiary headquartered in Paris, Interparfums S.A. and United States-based operations through its wholly owned subsidiaries headquartered in New York. It's now my pleasure to turn the call over to Mr. Jean Madar. Jean?

Thank you, Karin, and good morning, everyone, and thank you for joining us today. Once again, I'm happy to report that the fragrance market remains robust and is continuing to grow, but of course, at a more sustainable pace than in the past two years. The strong market only goes so far. Equally important to our success is our ability to swiftly adapt to changing consumers' preferences, new trends as well as the ever-changing challenges of a global business while delivering our products sustainably and efficiently to our retailers and distributors. Historically, our third quarter has been our strongest, owing to the pre-holiday season shipments and the third quarter of this year did not disappoint. In terms of sales, it was not only the best third quarter, but also the best quarter in our history. Michel in a couple of minutes, will provide insight into our financial results. So third quarter sales across all markets were strong. Our three largest markets, North America, Western Europe and Asia Pacific grew sales by 12% for North America, 25% for Western Europe and even 15% for Asia Pacific. Central and South America sales also continued on its positive trajectory with a 20% growth. Sales in Eastern Europe bounced back after being impacted by sourcing constraints earlier in the year, achieving third quarter sales growth of 23%. Also, our Travel Retail business continues to strengthen slowly, but surely. In the first nine months of the year, it has increased 24% from this time last year, representing approximately today 7% of net sales, getting us closer to our target of 10% of annual net sales. Regarding our presence in China, we recognize that we are currently underpenetrated in this market, and we are fortunate to have remained insulated from the huge volatility and challenges that many companies in our industry faced in this region. We have been closely monitoring the region and determined that the timing for entry is not yet right. At this time, we are in the initial stages of developing a strategic promotional program aimed at accelerating growth in the Chinese market, but only in 2026 in a very measured fashion. From a channel perspective, for the first nine months of 2024, direct sales to retailers and travel retail represented approximately 37% of our net sales, up from 35% one year earlier. Direct sales are primarily in the U.S., in France and in Italy, while retailers are adopting a leaner inventory approach, our product sales have remained strong despite the reduced stock available on store shelves. And since the majority of our net sales are conducted through our global network of distributors, we are as committed to them as ever in terms of point-of-sales advertising and promotional support, product development and marketing. With an increase of sales direct to retailers, we are also seeing an uptick in our promotional gift set program. Gift sets are a fundamental offering in the Beauty industry and deliver highly desired value for our retailers' customers. While demand is not as high as we have seen across our U.S. consumers, we are seeing growing demand for gift sets across Europe and even in the Middle East. During the summer, we fulfilled initial orders of gift sets and achieved healthy sellout plus strong reorders in the fall. Our retailers are now restocked and well prepared to serve their customers ahead of the holiday season. Turning to our strategic initiatives. Our success reflects the consistent outperformance of many of our prestige brands and the resilience of our team members who tirelessly ensure operational excellence throughout our organization. There have been key areas of improvement this year that are in large part driving our results, which include our advertising and promotional programs and footfall spread of new products. Regarding our advertising and promotional program, we have continued to focus on social media and to a lesser extent, legacy programs such as billboard, TV and print media. During the first quarter and throughout the entire year, we increased our content creation by expanding our high-caliber campaign across Instagram and TikTok to great success. We are also expanding into user-generated content to encourage purchases through highly engaged social media influencers who hold considerable sway in the world of Beauty and Fashion and increasingly include male influencers. Women's Wear Daily reported that Amazon did $250 million in men's fragrance sales last year, up 43% from the prior year. while Amazon women's fragrance business grew 34%. The article called out Montblanc as one of Amazon's best seller, while women's fragrance sales have traditionally outpaced men's, recent trends show that the gap between them is narrowing. At [indiscernible], the integration of influencers and new digital platforms is becoming a central access of marketing strategies, guaranteeing greater proximity with consumers and agility in the face of market changes. We also regularly coordinate with our brands, fashion houses, resulting in both partners benefiting from the synergies of brand recognition and appreciation. For instance, our latest Oscar de la Renta fragrance called New York Eau De Parfum was featured at New York Fashion Week and Invogue Magazine. Also noteworthy at the Marie Claire U.S. Fragrance Awards event, our Donna Karan Cashmere collection was selected this year's best fragrance collection and Oscar de La Anta Alibi Pop was chosen as best eau de toilette. Turning to our pipeline of product launches. During the quarter, we began distributing new scents for the Moncler called [Les Homme] collection in the Middle East, which will go full scale in 2025. Also debuting were Oscar de la Renta New York Eau De Parfum, as mentioned earlier, and the [indiscernible] Modern Princess. We also introduced extensions for GUESS with Uomo Intenso and MCM Diamond, a new look and scent of [indiscernible] pillar. We have also captured lots of media attention with the ultra-deluxe limited edition version of MCM award-winning fragrance, MCM Eau de Parfum, which is embellished by hand with approximately 1,100 [swarovski crystals]. Our new DKNY blockbuster fragrance, DKNY 24/7, is doing very well, and we are expanding its geographic distribution to new markets as well as fulfilling reorders from initial customers. As we mentioned in our third quarter sales release, the DKNY Donna Karan brand duo is on its way to be our next $100 million brand. We are also continuing the global rollout of Roberto Cavalli, Sweet Ferocious and Lacoste Original. These two new brands combined sales are expected to add approximately EUR $100 million in incremental sales in year one. We have a good lineup of new product launches in the coming year. For our second largest European-based brand, Montblanc, we will welcome a [new pillar]. Similarly, [new pillars] will be unveiled Ferocious [indiscernible]. We are also growing the Montblanc Explorer, Jimmy Choo Man and Coach For Men and Women fragrance families. The same for our Kate Spade, Moncler, Van Cleef collections. For Lacoste, the Original Men and Women and [indiscernible] lines will be expanded. And of course, our own [indiscernible] luxury fragrance collection named [Solferino Paris] will begin limited distribution in the summer of 2025. The collection was designed to compete with niche fragrances by bringing our scale and knowledge of this category and the power of our distribution, which should enable us to make this start-up a success. Furthermore, since we are not paying the usual royalties to the brand owner because we own the brand, we can put that money to good use in A&P. For our U.S.-based operation, we will unveil new pillars across several of our brands, including two new [indiscernible] for Donna Karan Cashmere collection, a blockbuster duo for Abercrombie & Fitch, plus new lines for Roberto Cavalli, Ferragamo and Ungaro. We will also be introducing new extension for several GUESS fragrance families and for MCM and enlarging the range of personal care products within each brand such as [Mist and Creams]. Boosting our momentum, our Italian subsidiary that has been serving as a distribution hub across all the brands since January continues to perform favorably. Online sales are also trending positively across Europe as we leverage our U.S.-based e-commerce experience to capture further sales. We are confident in our product expertise, strong brand relationships and efficient distribution capabilities. Together with a dynamic market, we believe we can achieve our net sales target and set yet another record in 2024. I will now turn the call over to Michel, our CFO, for a detailed financial review.

Thank you, Jean, and good morning, everyone. By all measures, the 2024 third quarter was the best quarter in our history as laid out by Jean. I'll drill down the P&L for some also of the highlights. On a consolidated basis, gross margin was unchanged from last year's third quarter at 63.9%. We did see some movements within the two segments, but these were primarily driven by brand and channel mix. On a year-to-date basis, consolidated gross sales expanded 30 basis points to 63.6%, and we expect full year 2024 gross margins to be slightly ahead of '23 at approximately 64%. On the A&P side, A&P expenditures increased 6% to about 16% of net sales and 19% to 16.6% of net sales for the third quarter and the first nine months of 2024, respectively. We're really seeing the results of our investments on our top line achievements and acutely supporting sustainable growth for the future. We continue to work towards our target A&P expense of 21% of net sales for 2024 with significant spending planned for the fourth quarter of 2024 to ensure a successful holiday season and strong start to 2025, similar to what we have done every year. Also included in SG&A expenses, royalty expenses approximated 8% of net sales for both the current quarter and year-to-date, and this is broadly in line with our historical rates. Once again, the amortization of the cost of the Lacoste license, which amounted to $4.8 million during the first nine months of 2024 or $1.6 million quarterly will continue over the 15-year life of the contract. Overall, SG&A expenses increased 12% and 16% for the third quarter and the first nine months of 2024, representing 38.9% and 41.8% of net sales, respectively. In the same period last year, SG&A expenses were 40.2% and 39.8% of net sales, respectively. Our third quarter operating margin was 25% compared to 23.7% in the same period last year. Year-to-date, our operating margin is sitting at a very healthy 21.9% compared to a very high base of 23.5% for the first nine months of 2023. As we reported yesterday, our net income was impacted by foreign exchange losses of $3.3 million in the third quarter as opposed to -- as compared to $0.7 million gains in the prior year, leading to a year-over-year swing of about $4 million. From a cash flow perspective, accounts receivables are up 41% from year-end 2023, but the balance is reasonable based on record quarterly sales levels and the seasonality of our business. Days sales outstanding was 83 days, up from 72 days from three months ago, but this is largely driven by channel and geographic mix as we reach more retailers and specialty stores directly. It is important to highlight that while our accounts receivable have increased, it has not really outpaced sell-in, and we continue to experience very strong collective activity with very little risk on [AR]. Our weekly reviews indicate that our receivables remain in good standing, and we do not anticipate any issues with account receivable collections. Our inventory levels at the end of 2024 third quarter increased 9% from the year-end 2023. The inventory buildup is designed to support and protect our service levels and the inclusion of our newest licenses, Lacoste and Roberto Cavalli. We are actively working on programs to deliver more inventory efficiency. And in that regard, the conversion of raw materials into finished goods resulted in finished goods making up 63% of our inventory levels at the end of September as compared to 58% only one year earlier. Our efforts to convert more profit to free cash flow by reducing our inventories are beginning to bear fruit with a significant year-over-year improvement in net cash provided by operating activities, which totaled $76 million compared to $18 million in the prior year third quarter. We closed the quarter with a healthy balance sheet with working capital of $617 million, including $157 million in cash, cash equivalent and short-term investments. Our long-term debt, including current maturities, was $179 million at the end of the third quarter. To reiterate, we are reaffirming our 2024 guidance of net sales of $1.45 billion, implying upper single-digit growth in the fourth quarter of this year. This results in earnings per diluted share of $5.15, which will set a new record for our company. At Interparfums, mastering regulatory, environmental and digital issues has been and will be key to remaining competitive. Thanks to our innovation approach, targeted premiumization and ability to offer unique experiences, Interparfums is well positioned to meet the challenges of tomorrow, ensuring sustainable growth and strong differentiation in our globalized market. With that, operator, please open the lines for questions.

[Operator Instructions] Our first question comes from Ashley Helgans with Jefferies.

This is Sidney on for Ashley. Can you talk a little bit more about the changes in consumer preferences you called out? It sounds like maybe there's a bit of a trend of the gap closing between men's and women's fragrance, but curious if there's any more trends you would highlight?

I can try to answer this. So yes, we see definitely some trends quarter after quarter, month after month. The men's part of the business is getting stronger. We see also no resistance to price elasticity. We even say that there is a trend to premiumization on the fragrance. More and more people are willing to pay more for fragrance. And we are even talking about younger people that are willing to pay more. That's why there is such a growth in the collections, niche, things that are less commercial, has more signature, the distribution is more selective. This is the new trend. But on the other hand, the classing business, the commercial business, the designer fragrance business that we have with our brands, could be Coach or GUESS or Montblanc, it's still doing quite well. So this is for me the important trend that I can identify.

And our next question comes from Korinne Wolfmeyer with Piper Sandler.

This is [indiscernible] for Korinne. I just have one on sell-in trends. What are those expectations for Q4? And then what are you seeing with retail order patterns for both the U.S. and internationally? And then just how far off is sell-in versus sell-out right now?

Michel?

Yes. So in terms of sell-in, I think as we laid out in our prepared remarks, we're projecting double-digit growth in the fourth quarter. And at this point in time, what we've seen in the first nine months is sell-in, this is not only true for us, but what we're seeing, this is also for our competitors. Sell-in has been slower than sell-out. And what we're seeing is destocking continuing to happen across the industry. So there's still a small disconnect between sell-in and sell-out, and it's been about a point, and it really varies from geography to another. So at this point in time, that's kind of what we're projecting for the fourth quarter. But our stock seems to -- our retailers are well stocked. And so far, the holiday season is going pretty well.

Our next question comes from Hamed Khorsand with BWS Financial.

A follow-up on this last question is, I'm just trying to get a hand on the sequential decline figure. I mean based on the current guidance, it's a 15% sequential decline in sales. And IPAR has never had that kind of degree of decline going into Q4 from Q3. So I just want to see if there's anything special there.

Michel, to you.

Yes. I mean, I think, Hamed, at the end of the day, sequential declines are very -- this is a very highly cyclical and seasonal business. Year-over-year, there can be various impacts. There can be launches, large launches, you can have new brands. So if you think about, for example, 2021, we added the Ferragamo brand in the middle of the year. So at the end of the day, it's always very difficult to look at these things on a sequencing basis. But if you look at our growth rates, I mean, our growth rates are projected to be for the fourth quarter, in line with what we've delivered on a year-to-date basis, which is about 10%. And do recall last year, we did have a very, very elevated year-to-date at the end of the third quarter, where we were up 27%. So overall, we are starting to lap some of the high-growth periods that we had last year. And that's one of the reasons why you're seeing a more normalized growth this year and also going forward.

Okay. And if I may, what is the benefit or impact of selling more gift sets versus the traditional individual?

I think that the customer is looking for a gift. These are value offers. And this is also a way to thank the loyal customer and to give him once a year some gift. Again, we can afford it. This is a practice. And you will see people going to department stores and really looking for this. For the people who don't know what it is, it's basically the same product, but we are giving away on the top of a regular size, a body lotion or a smaller size or -- I think it's a way to keep our customer close to the brand. It's also to thank them for being close to the brand. And for us, of course, it has a little impact on the margin, but we are able to manage it. It was a very, very important in the U.S. for years. It's becoming more important in Europe. We see trends that this is going to be important almost every year. So we'll continue to manage it. We don't want, of course, this business to be too big. But in the first quarter, it's quite normal to have gift sales. Yes, Michel.

No, I was just going to build on Jean, which is, every business has some level of promotionality. You can either promote based on price or you can promote through these kinds of mechanisms. These mechanisms tend to be a lot healthier in terms of long term and preserving the long-term value of your products in the market. So this is really -- at the end of the day, it's a much more effective and luxury supporting promotional mechanism.

Got it. Okay. And then could you just -- if I missed it, excuse me, but is there an update on the luxury line for release in 2025?

Michel?

Yes. I think the plan is to launch in the summer of next year. That is the current plan. I do want to insist this is still really going to be very small. I mean, obviously, we're -- this is a very important strategic play for us to enter this space. But these brands take time to be built up. So this is not going to represent a significant building block for next year.

And our next question comes from Oliver Chen with TD Cowen.

The fragrance market in terms of somewhat moderating, when do you expect that to abate as we are -- we continue to be in this normalization phase or a catalyst for it to perhaps reaccelerate in the future? Also, it's nice that you're driving higher demand across Europe and Middle East sell-in relative to the U.S. Just what's driving that and helping us compare and contrast these markets could be useful for us as well. China has also been a tough market, and I know you spoke about promos and tactics, but what do you see for China? Some of the overhang macroeconomically could be structural and multiyear in nature. So I would love your thoughts on how to compete in that market as well.

Michel, do you want to answer the first part? I will answer the second.

Oliver, we continue to see pretty healthy demand across the market. And the markets are growing. We continue to see double-digit growth across the market. We're not really -- this is what the NPD data is kind of telling us. But when we look at our competitors and when we look at overall what's happening from a sell-in standpoint, there seems to be a bit of a disconnect there. And again, I think this is in part driven by some of the adjustments that are being done within the inventory levels and the stock and trade levels. We keep thinking that the market is going to slow down, and I think that is always reflected in our guidance. And I think we've all been happily surprised quarter after quarter that the market hasn't slowed down. I think a lot of the trends continue to be good, particularly, I would say, in the U.S., where we are seeing an increase in penetration, very strong increase in penetration and usage. And I think that has been really fueling the market.

Okay. And...

I'm sorry, if I may. I would like to add that we have seen a double-digit growth. We have grown at a rate of 10% in the first nine months of the year. But we think that with a stronger sellout than sell-in, we anticipate the growth going forward to slow down. I don't think we are going to see the same type of growth that we had in the last two to three years, which is fine. I mean we -- before COVID, this industry -- fragrance segment of the industry was growing at a 2% rate. So we'll do better than that for sure. But when you see our peers and when you see the market, I think we have to be prudent on the growth. So the good news is we have brands in our portfolio that are at the beginning of their life cycle. Lacoste is not even one year old under our management, and we have a lot, a lot to do with our -- with this new brand. Roberto Cavalli is also new in the portfolio, and we have blockbuster launching in 2025. So because of the activity and because of the portfolio, we think we will continue to lead our peers. But I want everybody to be reasonable and do not expect in the future what we have done in the past for sure.

Very helpful. And Michel, on your destocking comments, when might that end? And we're definitely seeing that across the industry as well. And then Jean Madar, as we look to next year, which product launches are most material? Are you most excited about if you had to prioritize a few?

Yes. So Oliver, I think the destocking has been slowing down. I mean it was much stronger at the beginning of the year, and it has been slowing down. I think overall, in the third quarter, it was broadly in line with our historical sell-out growth. So I think at this point in time, I think we're feeling that the destocking is behind us.

So regarding the brands with some very interesting new launches next year. Let's mention Jimmy Choo, let's mention Lacoste, let's mention, of course, Roberto Cavalli, Ferragamo. And GUESS has also very interesting programs for 2025. So almost all our largest brands have new pillars or new blockbuster. So we are quite confident.

And we have reached the end of our question-and-answer session. I'll now turn the call over to Michel Atwood for closing remarks.

All right. Well, thank you again for joining our call today. Before I end the call, I would like to announce a few upcoming events. We'll be providing initial guidance for 2025 next Tuesday, November 12 at the close of the market. On December 5, D.A. Davidson will be visiting our New York headquarters as part of its seventh Annual Holiday Beauty and Wellness Bus Tour. And on December 9 and 10, I'll be participating in the Raymond James Consumer Conference here in New York City. So if you are interested in attending any of these events, please reach out to their respective sales representative. I also want to take this opportunity as we get into the end of the year to really thank our teams and our organization. Clearly, these results are very strong. We wouldn't achieved a record year without the help and support of our entire organization. So I really wanted to tip my hat again to the team. We don't get these results without a lot of hard work and dedication. So this is really a big nod to the organization, to the IP organization for all their hard work and support this year. If you have any additional questions, please contact Karin Daly from the Equity Group. She's our Investor Relations representative, and her telephone number and e-mail address can be found in our most recent earnings release. So, we look forward to the next conference call, and thank you, and have a great day.