IPAR - NASDAQ

Greetings, and welcome to the Interparfums, Inc.'s Second Quarter 2025 Conference Call and Webcast. [Operator Instructions] As a reminder, 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, Joe. Joining us on the call today will be Chairman and Chief Executive Officer, Jean Madar; and Chief Financial Officer, Michel Atwood. As a reminder, 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 heading Forward-Looking Statements and Risk Factors. Forward-looking statements speak only as of the date on which they are made, and Interparfums undertakes no obligation to update the information discussed. Interparfums consolidated results include two business segments: European-based operations through Interparfums SA, the company's 72% owned French subsidiary and United States-based operations. With that, it's now my pleasure to turn the call over to Jean Madar. Jean?

Thank you, Karin. And good morning, everyone, and thank you for joining us on today's call. We began the year on a strong note, and that is continuing, but at a slower pace and with more speed bumps along the way than in recent years. Even so, the measures undertaken months ago, including price increases that will come into effect beginning this month and strategically shifting some of our sourcing and manufacturing, along with product innovation and effective advertising and promotional programs have enabled us to maintain and fulfill demand for our fragrance products. There is no question that momentum eased in the second quarter for us and many others in our industry and some of the challenges we faced will likely continue into the second half of the year. That said, our lean, adaptable operating model, combined with the support from our distributor, retail and manufacturing partners as well as the proactive and timely actions we have taken position us to fully resolve these challenges by 2026. As we reported last month, for the first 6 months, organic net sales, which excludes the impact of foreign exchange and the discontinuation of the Dunhill license rose 3% with first quarter shipments ahead of budget and second quarter below. European-based operations reported net sales grew 6% in the second quarter and 7% in the first half, with robust performance in the U.S. that outpaced the broader fragrance industry, led by Jimmy Choo fragrances. In our U.S.-based operations, reported second quarter net sales were down 20%, with 8% of that due to sell-out of the remaining Dunhill inventory last year, which concluded in August. On an organic basis, U.S. operations sales were down 14% in the second quarter and down 6% in the first half. As I review regional performance, I will be focusing on the first half of the year rather than the second quarter, which was unusually volatile this year. We experienced solid growth in our two largest markets, North America and Western Europe. North America sales rose 7%, and Western Europe rose 3%. Central and South America sales increased 7% with the success of Lacoste fragrances and also nice growth in Coach fragrances and generally a healthy growing market. Sales in Eastern Europe were up 14% as compared to the first half of 2024, when we encountered sourcing constraints at the time. Asia Pacific fragrance sales were down 12% in the first half, and we were against strong sales last year in Australia, but we have very high challenges in South Korea. Positive takeaway from the region is that overall trends in China and Japan become a little bit more favorable. Middle East and Africa declined 19% and it's an important region for us reflecting the exit of the Dunhill license. Excluding the impact of Dunhill, net sales declined 6%. We have a strong fragrance lineup in the works for the remainder of the year. For our European-based brands, we will be launching the latest edition of the Jimmy Choo, I Want Choo franchise called I Want Choo with Love. And while Montblanc sales were broadly flat during the quarter, we are already encouraged by the promising response to the recent debut of Montblanc Explorer Extreme, and we'll continue to strengthen the brand with a new extension to the Montblanc Elixir brand alongside an exciting addition to Karl Lagerfeld Ikonik franchise. Since joining our portfolio, Lacoste fragrances have delivered outstanding results, and we are eager to build on that momentum with the upcoming introduction of Lacoste Original Parfum. We are adding new members also to the Moncler's [ Les Sommets ] collection as well. Additionally, we are nearing the debut of our first fragrance release for our owned brand called Solférino. This collection of 10 fragrances crafted by master perfumers stays true to artisanal roots through carefully selected distribution and premium merchandising, ensuring a truly exceptional experience for our customers. Next month, we will open our flagship boutique in the heart of Paris alongside the launch of our e-commerce platform and the products were just introduced this week at Selfridges in London, allowing us to connect with customers both locally and globally. This marks a new chapter for Interparfums, filled with the promise of growth and discovery in the art of artisanal and luxury fragrance craftmanship. And the insights we gain will not only enrich these lines of fragrance, but further empower us to elevate and better serve the entire family of brands within our portfolio. For our U.S.-based operations, we are set to introduce several scents including Just Cavalli blockbuster duo for Roberto Cavalli plus several extensions for GUESS, for DKNY, Ferragamo and Abercrombie. As announced last month, Interparfums has been selected as the exclusive fragrance licensee for Longchamp, a leather goods -- a French leather goods and fashion brand that was established in 1948 and now has approximately 400 stores across 80 countries. By combining Longchamp's rich heritage and creativity with our expertise in fragrance development, we plan to launch their first ever women's fragrance in 2027 with a focus on Europe and Asia Pacific. So we are very happy to have signed this new fragrance license. And of note, there was no upfront fee to obtain this license. Before I hand it over to Michel to discuss the financial results, I want to touch on a few operational updates that have been front and center across the industry. We are seeing strong momentum in our e-commerce channels and expanding our presence, especially on Amazon. Platforms like Divabox and TikTok Shop are also gaining traction and showing promising growth. In fact, we are developing special programs tailored for e-commerce, such as TikTok specific SKUs, typically smaller size at lower price point to better meet the expectations of these customers who are often looking for a more affordable version -- options, I'm sorry. Amazon continues also to be a key focus. The good news is that thanks to our success there, more brands are now willing to sell on Amazon after we demonstrated strong numbers. Their business on Amazon has been growing steadily. It's important to note that Amazon Beauty is very much a control platform, but we can't overlook the platform shares influence and reach. Divabox, currently the #2 e-commerce platform for fragrance in France is another exciting area for us. On the traditional retail side, there are no major changes. Big retailers and specialty stores like Macy's and Ulta continue to hold steady market share and maintain strong business. As we discussed on our previous call, we are making strong progress and remain on track with the transition out of our own operated facility in Dayton, New Jersey. This move will likely happen just after the summer with a target to be fully relocated to the new facility and working with a third-party logistics partner by the end of Q3. At that point, we expect to be fully utilizing third-party providers for packing, shipping, warehousing and order fulfillment. As it relates to tariffs, and I'm sure if you have more questions, I will answer this during the session of the Q&A. But we got some good news recently, the agreement to keep tariffs on goods from Europe at 15% and to eliminate tariff on U.S. export to Europe. Earlier projections had us bracing for 30% to 50% plus also reciprocal tariff from Europe. So this is a meaningful improvement even though the increase from 10% to 15% for imports to the U.S. is higher than we had initially planned. The recent agreements finalized with South Korea, Vietnam and the Philippines as well as a preliminary deal with China provide greater clarity on the global trade environment and confirm the immediate action and longer-term plans we put in place 3 months ago remain the right ones. On our sourcing strategy, first, just to clarify, we do not fill or finish any of our goods in China. That said, we do still source a lot of components from there, including plastic caps, certain pumps, some metal parts and we have already started moving towards alternative sourcing options outside of China. It's a transition, and there may be some short-term impact, but between this and other steps we are taking, we expect to absorb it without major disruption. Another key step is localizing production where it makes sense, we are shifting manufacturing closer to the end market. This is mostly valid for certain SKUs that are produced in the U.S., but where most of the business is in Europe or other region. This shift will help us to minimize the U.S. import tariff on components. As it relates to pricing, we have taken a very selective approach, meaning it hasn't been applied across the board. We implemented more aggressive mid-single-digit percentage price increase in the U.S. where the tariff on imported finished goods have had the biggest impact. In other markets, we've generally held entry-level pricing steady on smaller sizes to maintain accessibility while applying more pricing adjustments to larger sizes or on brands that are less price sensitive. Overall, we are looking at approximately 2% average price increase at the total company level, which will progressively take effect between now and the end of the year. The next 3 months are going to be critical as we focus on the holiday selling. In the first half of the year, sell-through outpaced sell-in and store inventory levels are still relatively low. It will be a key marker to see how retailers stock up for the holiday season. We already started Phase 1 gift sets and holiday orders and how this phase perform will set the tone. One thing to keep in mind, the holiday seasons continue to shift later and later. If retailers don't carry heavy inventory now, we will need to be ready to ship deeper into the season, potentially even into beginning of December. That puts added pressure on logistics and manufacturing, so we are making sure we are ready to respond quickly. As we continue to navigate the current landscape, we remain confident in our ability to deliver on our goals for the year by making progress across all areas of our business. With that, I will turn it over to Michel Atwood. Michel?

Yes. Thank you, Jean. Good morning, everyone. Let me start with our overall results, and then I'll go through the details for our European and United-based operations. As Jean shared and as previously reported, we delivered net sales of $334 million, a slight decline from the 2024 second quarter due in part to the shift of some of the sales from the second quarter into the first quarter we had disclosed in the first quarter release. On an organic basis, our first half sales grew by 3%, and we remain on track to meet our guidance for the year, supported by a balanced mix of legacy scent sales, key brand extensions, the seasonal lift we typically see from gift set sales in the third and fourth quarter and favorable foreign exchange impacts. Gross margin expanded by 170 basis points to 66.2% and 150 basis points to 65% for the second quarter and first 6 months of the year. This was driven by favorable brand and channel mix and namely the impact of the discontinuation of Dunhill, which drove a big part of the improvements on the U.S. operations during the quarter, which you've seen as well. SG&A expenses as a percentage of net sales were 48.5% and 45% for the second quarter and first half of 2025 as opposed -- as compared to 45.6% and 43.6% for the comparable periods in 2024, with A&P expenses of $69 million or 20.6% in the second quarter and $120 million or 18% of first half net sales, respectively. Our A&P investments grew 5% in the first half compared to 2024 as we continue to execute our successful strategy of investing in A&P slightly ahead of growth to fuel healthy sellout. Overall, our consolidated operating income was $59 million for the quarter, a 9% decrease from the prior period, resulting in an operating margin of 17.7% or 120 basis points decline from the 2024 second quarter. Year-to-date, however, operating income increased by 1% to $134 million with operating margin at 20%, with 10 basis points improvement from the prior year period. Below the operating line in the first half of the year, there was a loss of $6.7 million as compared to a loss of $1.5 million in the corresponding period last year. Two factors were behind the swing. The first is foreign exchange. There was a loss of $2.4 million in the first half of 2025 compared to a gain of $300,000 in the first half of 2024. As you know, the significant swings in the euro-USD, which went from 1.03 in early February to 1.17 at the end of June helped our top line but resulted in larger-than-usual FX losses. The second factor was the impact on our marketable securities, where we recorded a loss of $3.4 million in the first half of 2025 compared to a loss of $600,000 in the first half of 2024. We did not experience a significant change in our blended effective tax rate, which was at 24.3%, up 40 basis points from 23.9% over the prior year period. Moving on to our two business segments. And given the volatility experienced in the second quarter, which is largely isolated and not reflective of ongoing trends, we will focus our discussion on the first half results. European-based operations net sales rose by 7% on a reported basis and 6% on an organic basis. Gross margin expanded by 60 basis points to 66.9%, driven by favorable brand and channel mix, while SG&A expenses increased 7% to $212 million. SG&A as a percentage of net sales remained flat at 43.4%, benefiting from economies of scale with higher sales. A&P expenses grew 8%, slightly ahead of sales and totaled $89 million, and represented 18% of European-based net sales for the first half. Overall, net income attributable to European-based operations increased 3% to $81 million. For European-based operations, net sales declined by 12% on a reported basis as the bulk of the Dunhill impact was absorbed during this period, which accounted for approximately 6 percentage points of decline. As such, net sales declined 6% on an organic basis. Gross margin expanded by 220 basis points to 59.7%, largely due to the discontinuation of Dunhill in the prior year period. While SG&A expenses declined by 1% to $91 million, SG&A as a percentage of net sales increased to 47.8% from 42.5% of net sales in the prior year period. And that's largely driven due to the lower sales. A&P expenses which remained broadly flat despite the sales drop and in order to protect sell-out totaled $31 million and represented 17% of United States-based net sales for the first half. Overall, net income attributable to the United States-based operations decreased 26% to $18 million, again, due in large part to the lower sell-in. At June 30, our balance sheet remains strong with $205 million in cash, cash equivalents and short-term investments and working capital of $654 million. From a cash flow perspective, accounts receivable was down 1% from year-end 2024 and days sales outstanding remained consistent at 74 days, similar to the 72 days in the prior year period, driven by changes in channel mix. By effectively managing working capital relative to our sales, we continue to improve our operating cash flow by $31 million, shifting from a $26 million of cash consumption in the first half of 2024 to a $5 million cash generation in the present 6-month period. We expect to achieve similar productivity in the back half of 2025. With a healthy sellout in the first half, driven by the strength of our portfolio and disciplined execution, we look ahead with cautious optimism about achieving our full year objectives and continue to maintain the guidance we outlined in November 2024. We believe that the continued resilience of the fragrance category, tariff-driven pricing actions in the second half and ongoing foreign exchange tailwinds will support us in meeting our goals. As such, we are reaffirming our 2025 guidance, which calls for net sales of $1.51 billion, and earnings per diluted share of $5.35. With that, operator, please open the line for questions.

[Operator Instructions] And the first question comes from the line of Ashley Helgans with Jefferies.

This is Sydney on for Ashley. First wondering, can you just talk about what you saw in terms of promotional levels, maybe how that progressed versus Q1 and then throughout the quarter? And then any more color you can provide kind of on what you're seeing from the destocking? It sounded like that wasn't a huge concern last quarter. So wondering if you do feel like that's kind of worsened in Q2 and maybe what you've seen from a trend perspective there? And then just any comments on end demand and kind of more granularity around that?

Yes. So maybe -- Sydney, I'll probably take the question around your last two, and then Jean can address the promotional levels. So I mean, destocking is always a very difficult one to assess. As you know, we sell to distributors who sell to retailers. So think about it as like it's kind of like when you get to a toll booth and somebody hits the brake on the highway, everything kind of starts to back up and things start to slow down. We've certainly seen a slowdown in the market. And as a result, the retailers have been more prudent and the distributors have also been more prudent. And I think that, that little disconnect between sell-in and sell-out is largely basically is factored and triggered that. Now related to that, your last question around the demand. Actually, the end demand was pretty good this quarter. The market was up overall -- for the top 7 markets that we track, the market was up 5% in the second quarter and is up 3% on a year-to-date basis. So it's actually quite healthy. And actually, if you look at how we did versus the market, we actually did a little bit better. We grew share in the first quarter. We also grew share in the second quarter. So overall, we have performed slightly better than the market. Now when we look at our competitors, we're seeing very similar situation, which is their sell-out typically is looking better than their sell-in. And as you know, obviously, Coty and Estée Lauder haven't published yet, but we see that pretty clearly through the numbers from LVMH and L'Oreal that actually had pretty -- had actually flat to slightly declining numbers for the first -- for this quarter. So overall, I think we're seeing pretty similar trends from our key competitors, which is sell-in is growing more slowly. And I think that really does show that it's a broad industry-wide situation that's kind of happening related to the slowdown, right. And Jean, on the promotional level?

I will add -- before promotional level, I would like to add something. As you know, we have been in this business for many years, more than 35. It's not the first time that we see gaps between sell-in and sell-out. And what I remember is it's usually a response to lack of visibility. The sellout is good, but the distributors or the retailers do not want to buy as much and take this opportunity to reduce their inventory. When it happened at this time of the year, I told my team that we have to be very ready to answer a big surge of orders that could happen in September, in October, in November, even at a very late stage. So we need to be agile. We need to -- and that's why we kept our guidance at this level because we think that due to the fact that the products are selling, our distributors are going to need merchandise very soon [indiscernible] for destocking. Regarding the first -- can you remind me the first question?

Promotional -- it's a promotional level, Jean.

Nothing in particular, nothing different than before. It's not more or less. The business, as you know, is already very promotional. We are using a lot of tools like gift with purchase and sampling, et cetera. But very -- I don't see any new things going on in the promotion.

The next question comes from the line of Susan Anderson with Canaccord Genuity.

I think just a follow-up really quick on the tariff-related impact to second quarter. By that, I guess, did you just mean retailers pulling back on ordering because of the tariffs? So I guess, similar to the destocking?

No, I would not. The retailers are not subject to tariffs. We gave them a price. But distributors for sure. But this is part of this uncertain times, lack of visibility that I was mentioning before. As of a couple of weeks ago, we are talking about a much higher tariff, and we are also talking about a reciprocal tariff, which thank God did not happen. But no, we cannot say that the lack of purchasing or the lack of -- the level of purchasing is lower because of tariff...

Got it. Okay...

Yes. I think that just generally people are being, I think, a little bit more prudent, I think is really what you're hearing from Jean. And that inevitably can drive a point or two...

And then I guess just looking out over the next couple of years, you've added quite a few brands, I guess, to the lineup, especially now with Longchamp, you have Off-White, Solférino. I guess do you think you'll still be looking to add -- like do you think you have capacity to take on more? Or is this going to kind of be the lineup in terms of new brands coming on board in the next couple of years?

This is a very good question. We always look for diversifying the portfolio. And I think the addition of the -- latest addition of Longchamp, Longchamp is a great company selling bags. We have very, very good experience and results with a brand like Coach. So it was very natural to capture the Longchamp brand. So between Longchamp, Lacoste [indiscernible] that are very well recognized and also more -- less known brands like Off-White or Goutal, we think that these are good complements to the portfolio. What does it -- does it mean we can take more? Definitely, we can absolutely take more brands. We will, of course, with time, edit the portfolio. There are some brands, smaller brands that maybe in a year or 2 or 3 will not be part of the portfolio. It's a natural life of a company.

And the next question comes from the line of Hamed Khorsand with BWS Financial.

I just want to ask you about -- your comment about the retailers and how they're waiting on purchasing. What kind of risk does that impose for you? Is there a chance where you get a big slug of your revenue gets pushed into Q4?

Yes. I mean definitely, when you have this kind of uncertainty, the September period, August, September period is generally a pretty big period for gift sets. It's very easy for things to kind of move from one week to another and could shift from September to October. I mean it's very difficult to kind of plan. It's also one of the reasons why we typically don't guide by quarter. We generally guide for the year. But again, I think, what Jean said is that what we're clearly seeing is that there is pent-up demand. We're seeing it through the market growth, through the consumption of our brands. And it's not only the case for us, but it's also the case for our competitors. So we believe that there's definitely some pent-up demand. And if the market continues to be strong, I think we'll certainly see probably some orders picking up in the third and fourth quarter. I think the other thing that people are going to wait and see and particularly in the U.S. is the impact of the pricing that is being taken to offset some of the cost of the tariffs. And I think that's probably why also some of the retailers in the U.S. are being a little more prudent.

Okay. And then to your comments about Amazon and TikTok, would you entertain a bigger portion of your manufacturing to smaller quantities, the smaller-size packaging?

No, we will do that not for every brands, but we noticed that there is some price point on TikTok that if you are above your sales drop immediately. So in order to do that, we have to create special programs. This was something that we started to work at the beginning of the year, and we'll have it ready for Christmas. So it will be interesting. But it's not right for all the brands, but some brands that are on TikTok needs a lower price. Lower price means for us, we even a smaller size, it's becoming more of a paid sampling. And it's -- the margins are good. The margins are actually the same. So -- and absolutely for these kind of programs. Amazon is a different animal. We really start to have some very, very good business on Amazon. We advertise with them. We work with them. It's growing at a double-digit pace. We are opening also Amazon in Europe. We start to work with them in Europe, U.K. I'm quite happy with the business on Amazon. And as you know, we own 25% of a very important website based in France called Divabox that is going to do over $100 million in sales. We don't consolidate the sales because it's an investment in the company, but we meet with them on a regular basis, and we learn from them what works, what doesn't work. This helps us a lot in our decision-making.

Okay. And Michel, sorry if you've answered this earlier, but what was the reason for the debt going up as much as it did Q1 to Q2?

Yes, Hamed, great question. I mean we essentially took out a loan. We made a few purchases at the end of last year and particularly in the first quarter. And I just -- we felt that it was a good time now to just kind of -- we like to manage our finances very conservatively. So it's largely to fund that. And also, we've been buying some additional space around our head offices in Paris. So it's really to buy -- it was really to buy assets, particularly like Goutal and Extra Space.

Thank you. This concludes the question-and-answer session. I'd like to turn the call back to Michel Atwood for closing remarks.

All right. Well, thanks a lot, Joe. All right. Well, thank you all for joining our call today. And Jean, I really want to thank our incredible team, partners, brands and all of our stakeholders. Your dedication, trust and collaboration continue to drive our success, especially as we navigate through these uncertain times together. I would also like to mention a couple of upcoming events. We will be hosting our annual meeting in person here in New York on September 10. And I will also be participating in the Wells Fargo Consumer Conference in Laguna Niguel, California on September 16 and 17. So if you'd like to participate in these events, please reach out to your sales representative at Wells Fargo. And if you have any additional questions, please contact Karin Daly from the Equity Group, our Investor Relations representative. Her telephone number and e-mail address can be found in most of our recent earnings releases. We look forward to meeting with you all at these events or the next conference call. Thank you again, and have a great day.