Participants

Karin Daly; Investor Relations; Inter Parfums Inc

Jean Madar; Chairman of the Board, Chief Executive Officer, Director General of Interparfums SA, Co-Founder; Inter Parfums Inc

Michel Atwood; Chief Financial Officer, Director; Inter Parfums Inc

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

Korinne Wolfmeyer; Analyst; Piper Sandler Companies

Ashley Helgans; Analyst; Jefferies LLC

Hamed Khorsand; Analyst; BWS Financial

Presentation

Operator

Hello, and welcome to the Inter Parfums First Quarter 2024 Conference Call and Webcast. (Operator Instructions) As a reminder, this conference is being recorded.
It's now my pleasure to turn the conference over to Karin Daly, Vice President at The Equity Group, and Inter Parfums Investor Relations representative. Please go ahead.

Karin Daly

Thank you, Kevin. Joining us on the call today will be Chairman and Chief Executive Officer, Jean Madar; Chief Finance 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 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 our most recent annual report, 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, our consolidated results reflect two business segments, European-based operations and United States-based operations.
Certain Prestige Fragrance products are produced and marketed by their European-based operations through there, 72% on French subsidiary Inter Parfums SA. When they refer to the US-based operations, Inter Parfums is talking about their wholly owned subsidiaries.
It is now my pleasure to turn the call over to Jean Madar. Jean, you may begin.

Jean Madar

Thank you, Karin, and good morning, everyone, and thank you for joining today's call. I have spent much of the last three months of the year traveling the world to meet with distributors, manufacturers, retailers and boutiques and recurring message here is that the momentum in the fragrance market continues that holds true for our business where stronger sell-in and sell-out as well as continued premiumization are gratifying.
Why is sell-out was excellent in the first quarter, even sometimes higher than selling. We are already seeing increased demand and sales acceleration starting in the second quarter as of the month of April can attest to. We expect sales and expansion in the second half.
Therefore, I remain confident in our ability to achieve another record year, just as our guidance in place. As we reported last year's first quarter was an exception with comparable quarter sales growth of 24%, spurred by a large number of new product launches and rollouts, particularly of our leading brand.
Therefore, the 4% sales gain in the current first quarter is still an accomplishment. Our growth primarily stemmed from continued success in our key brands, plus the addition of our newest licenses, Lacoste and robotic Valley, which combined drove $25 million in sales.
This fragrances were well received by retailers in fact, we were able to maintain 90% of shelf space for these brands during the transitional developmental period. Early results are very encouraging. And with the addition of new fragrances, our 2024 goal of [90 million] for Lacoste and heavily combined is very achievable.
Before I proceed, as I'm sure you all heard, Herbert took a value sadly passed away in Florence on April 12. And I would like to say that he revolutionized Italian fashion and defined glamour like Novar as a king of excess, leaving a lasting mark in the world. Of fashion made legacy live on inspiring us to embrace uniqueness as before new path in fragrance creation.
Back to business. North America, our largest market had the slight decline in sales attributable to the concentration of launches in early 2023. However, NPD research data reflects sell-out remains strongly, growing double digits in comparison to prior year. Western Europe grew sales by 10%. But Eastern Europe is understandably declining in sales due to temporary sourcing constraint, which led to sales shifting from the first quarter to the second quarter.
In Asia Pacific, we are achieving further growth stemming from increased demand, especially in Australia and India. Given the economic and social repercussions of ongoing conflicts in the Middle East and Africa, sales have declined travel retail is finally booming, again, increasing 12% during the quarter as consumers travel to explore new cultures and experience different ways of life, while also seeing increasing shelf space and assortment of our portfolio of brands.
I have personally witnessed heightened levels of travel and with my views in line with industry trends while increasing our budget for Travel Retail sales for our two largest brands, Montblanc and Jimmy Choo decline during the first quarter after their respective 28% and 63% sales growth in the 2023 first quarter. Coach guess and Donna can achieve sales increase 5%, 21% and 44% respectively.
Coach fragrances remain in high demand with established lines, so both men and women. So I guess the combination of legacy scents and the beauty of our newest fragrance guest iconic led to another quarter of significant sales growth as such for the time guest could become the top three fragrance brands in our portfolio and some of the fashion house do Donna Karan and DKNY.
We strategically launched the new 4% cashmere collection in alignment with the fashion house luxury fashion campaign, which later to that, which led to enormous growth in the quarter. We also achieved further expansion by several of our midsize brands, including banks and Arpels, MCM and Kate Spade, we've 25%, 15% and 20% sales growth, respectively.
As we mentioned in our earnings release yesterday, we have an ambitious launch strategy plan for the balance of 2024, including blockbuster fragrances for DKNY and Lacoste and extensions of the Jimmy Choo.
I want Choo and Roberto Gabelli signature lines, multicenter collection forecast. Flankers are coming to market this spring, followed in the fall by a new member of the war moments fragrance family. Furthermore, extension for Hollister and Ceragon will similarly that will debut later in the year.
Beginning this year, our Italian operation started distributing brands within our European-based operations after serving as a distribution hub for certain of our US-based brands, most notably Ferragamo in 2023, we plan to expand our retail distribution capabilities of time.
We'll also launch phase two of the distribution rollout for Abercrombie & Fitch and Fitch shares during the quarter after a successful Phase one distribution rollout. We expect to see further sales expansion as we complete Phase two this year.
Before turning the call over to Michelle, I'm proud to report that as the person moves further up, the industry ranks are causing tumors where the annual duty top 100 issue published last month in which we placed number 30, up from 33 and 40 in 2023 and 2022, respectively, which is a nice accomplishment considering well, a pure play fragrance company scored against companies that also sell cosmetics, skin care home fragrance and hair care along with fragrances.
So for me, the fragrance market remains very dynamic. And as isn't alpha, we are committed to providing retailers and consumer with new fragrance experiences to serve their senses curiosity and fragrance wardrobe. We have great brands, including two new ones, so a well-balanced pipeline of new product launches and are operating in a prestige and luxury market that remains robust.
So now I will turn the call over to Michel for a more detailed financial review. Michel?

Michel Atwood

Thank you, Jean, and good morning, everyone. Yesterday we reported net sales of $324 million during the first quarter of 2024. This represented a 4% growth from the prior year period. This reflects flat sales for European-based operations and 18% sales growth within our U.S. based operations. The 2024 first quarter was in line with our expectations from a sales perspective.
There are a few moving pieces that I'd like to discuss today on today's calls that led to the 24% decline in net income. Firstly, gross margins eroded by 260 basis points on an overall basis due to unfavorable segments, geographic and channel mix within our European-based operations.
We also increased our trade spending to support the business, which was an integral part of our strategy given the lumber, the limited number of fragrances we introduced earlier this year. It was also modest cost inflation in 2023 for purchases made in Europe due to higher energy costs.
And while this has subsided with the financial accounting method, we must use the older higher cost components in our inventory purchased at our premium. Fortunately, these margin impacts are non-recurring and have lifted.
And as we go forward in 2024, we expect 2024 gross margins to be broadly in line with 2023 as we've explained previously, as we end, we will consider potential moderate price increases in the second half of the year if needed.
Within our US-based operations, gross margins increased to 58.7% of net sales, primarily driven by favorable brand and channel mix. We have increased our sales directly to retailers as opposed to third party distributors due to our growing U.S. direct to retail business.
The increase in sales has allowed us to continue to absorb more fixed expenses such as depreciation and point-of-sale expenses as compared to the prior year period. So that covers off our gross margin.
I'm going to touch on SG&A. So SG&A increased to 41.5% of net sales compared to last year's 36.1%. And this is due primarily to our increased investments in advertising and promotion, which aggregated $48.3 million and $35.2 million in the first quarter of 2024 and 2023 respectively, and this represented 14.9% of sales versus 11.3% in the prior year period.
So a couple of points I wanted to make regarding these numbers. First, as we all know, we're driving strong sell-in and sell-out for our newest brands, the costs and Kibali, and we're able to fill the shelf space. So I mentioned earlier, these two brands have excellent growth potential. And to capitalize on that potential, we invested in advertising and promotional programs to drive those legacy fragrance lines.
We also invested in new programs in preparation for the new products we are currently developing for the year. We have again budgeted our A&P spending to be 21% of net sales. However, in 2024, as I've previously explained on many occasions, we are spending we are spreading our A&P investments somewhat more evenly over the quarters to build brand awareness and to drive competitive agents sustainable growth going forward.
The incremental investments made in the last six months are paying off as we are seeing healthy sell-out in store has explained Bijal with the double digit growth in consumption in the US. For example, royalty expenses total 8.4% during the current quarter, up from 7.7% one year earlier. This is largely driven by brand mix. The amortization of the cost of the low-cost licenses accounted for $1.6 million during the first quarter of 2024 and will continue over the life of the contract, which is 15 years as a result of these investments.
Our operating margin for 2024 first quarter was 21% and represented a return to a more normalized level compared to the abnormal and unsustainable 29% in the prior year's quarter is also more in line with what we're seeing or with our competitors.
We closed the quarter with working capital of $530 million, including approximately $100 million in cash and cash equivalents and short-term investments resulting in a working capital ratio of 2.8:1. Our long-term debt, including current maturities, was $145 million at the end of the current first quarter compared to $174 million in March 2023 associated with the Paris headquarters and low-cost licenses, and we're paying those down over time.
From a cash flow perspective, accounts receivable is up 20% from prior year from year end to 2023. The balance is reasonable based on our sales levels and the seasonality of our business. The days sales outstanding was 73 days, only modestly higher from the corresponding period in the prior year, and we continue to see strong collection activity and do not anticipate any issues with collections given our long history, strong partnership with our retailers and distributors.
Inventory levels are up 9% from year end 2023, as expected since we have consistently been building our inventory since 2021 and the additional inventory buildup from producing goods for low cost and commodity.
Before I turn it back to the operator for Q&A, I will touch on our guidance. We are again reaffirming our 2024 guidance as the tailwinds for the year far outweigh the headwinds we have faced. Thus far, we expect to achieve 10% annual sales growth to $1.45 billion.
For further perspective, we believe the first half will be more modest high-single digit growth, largely due to the timing or new product launches in the first quarter, and we are expecting double digit growth in the second half.
This should lead to an 8% increase in earnings per diluted share of $5.15 of note included in our guidance, the low-cost non-cash amortization expense of the acquisition cost is expected to reduce our 2024 EPS by approximately $0.11. Excluding this impact, we are projecting EPS growth of 11% versus the full year 2023.
With that, operator, please open the line for questions.

Question and Answer Session

Operator

(Operator Instructions) Linda Bolton-Weiser, D.A. Davidson.

Linda Bolton-Weiser

Yes, hi.

Jean Madar

Hi Linda.

Linda Bolton-Weiser

I would just like to get a little more color on the cadence among the quarters, just so we get it all right. I guess for the second quarter because the prior year comparison sales growth is really high too in the second quarter.
So the comparison does not get easier. So in the second quarter or do you anticipate a little bit higher year-over-year growth of sales or lower or even flat sales? Or maybe you could give a little color? And then also the gross margin I would think wouldn't move up sequentially from the first quarter. Can you give a little color on that? Thank you.

Jean Madar

Yes, Michel?

Michel Atwood

Yes. So Linda, we are we are expecting double digit growth in the second quarter, which related to also some of the shifts that we discussed between the first quarter and the second quarter. But at this point in time, we are expecting double digit growth in the in the second quarter and also in the subsequent quarters for the for the balance of the year.
And for the gross margin, as you know, we have we have a significant we had a significant charge last year in the second quarter for excess and obsolescence, which are which goes away and go on from there we are we are so there will be a significant help in gross margins in the second quarter and for the balance of the year, again, we are expecting I mean the bulk of the gain will come into the second quarter and for the balance of the year, there will be some marginal at this point in time.
Some marginal increases in gross margin. But again, for the whole year, we're projecting if you're modeling this out, you should assume that the one-time gain from the one-time charge we had in the second quarter will go away and then we'll kind of normalize for the balance of the year to get to roughly the same gross margin as in 2023.

Linda Bolton-Weiser

Thank you. That's very helpful. And as a follow-up, is there any way you could quantify the shift in Eastern Europe related to the component shortages? How much shifted from first quarter to second quarter?

Michel Atwood

We expected that that was about between 2 and 3 points.

Linda Bolton-Weiser

2 to 3 points, percentage points as well?

Michel Atwood

2 to 3 points of growth.

Linda Bolton-Weiser

Of growth. Okay, thank you. And then I was curious about and Cody actually really specifically said that they felt the global fragrance prestige fragrance market had accelerated in growth in the first quarter to mid-teens growth globally. So are you kind of in agreement with that? And do you have any sense for how your POS performed relative to the market in the first quarter?

Jean Madar

On young, I can try to -- Michel, you want to answer that?

Michel Atwood

No, no, go ahead absolute Jean.

Jean Madar

I tend to I tend to agree. We could see we have double-digit growth in many are important to regions US for sure. In the first quarter, gentlemen, we challenge plants for sure or growth of double digit. So maybe it will slow down in the but we have seen a robust numbers for the for the first three months. Michel?

Michel Atwood

Yeah, definitely I confirm we have seen double digit growth on the US. I think the PD. growth for the quarter was up, I think 16%, if I'm not mistaken. And we've also seen a low double digit growth for most of the larger European markets like Germany, the UK, Italy, Spain, I think France was up was low single digits. But overall, I think the market continues to be the very strong. And although I don't know key markets and key European markets.

Linda Bolton-Weiser

Great, thank you. And then just my last question is on pricing. You alluded to positive potential price increases in the second half. I mean, CODI is really talking of being very targeted, very Pacific, seemingly more reluctant, I guess, to take pricing. So I'm wondering, do you think this would have some negative effect for you to take pricing as competitors or not, or as you know with we are if I can track.

Jean Madar

So we are also reluctant to increase prices. And we see that the certain products or certain lines could do have a price increase, but we'll do it today in a very targeted way. And we have not a data comparing to the other competitors have not increased a lot in pricing.
So we still have we still have room and in general, our retail, but I'm talking about prestige fragrances, our retail price up below the competition. So we still have two, we still have them both. We don't want to make it to a rule. We don't think that all our brands in our portfolio will have a price increase, but certain products are different.

Linda Bolton-Weiser

Okay. Thank you very much. I appreciate it.

Jean Madar

Thank you. Thank you, Linda. It was a pleasure to meet you.

Operator

(Operator Instructions) Korinne Wolfmeyer, Piper Sandler.

Korinne Wolfmeyer

Thanks. Good morning. And I'd like to first touch on the on the cost and Kibali sales, I think you said it was about $25 million in the quarter. Is there any way to quantify how much of that was kind of like retail inventory build versus what the proper quarterly run rate is to think about for both these brands going forward? I think previously you've quantified both Ventas made $90 million for the year. Is that still intact? Or are we tracking ahead of that? Thanks.

Jean Madar

Michel?

Michel Atwood

Yes. So Korinne, when you take over a brand, there's already pretty much of a pipeline that's out there, the product the brand is listed. And so essentially, this is really a replenishment of consumption in most cases.
Now obviously, when you take over a brand, you've assessed the landscape and there might be additional distribution opportunities. So we'd say at this point in time, we're on both brands. We're ahead of budget for the time being we feel pretty confident about that $90 million for the year, hopefully finished a little higher.

Korinne Wolfmeyer

Great. Thanks. And then on the Middle East last quarter, that was a point of caution for you and a reason behind on the guidance that you laid out. And I think what you said it was it declined a little bit in the quarter. Was that in track for online in line with your expectations? And was it worse? Was it better? How should we think about that region for you?

Jean Madar

So what we see in the Middle East was in our budget. So we projected to have a certain softness region because of the geopolitical tension. But we have we are more optimistic for the second half of the year regarding the region. So we ship that to sales in the important Saudi Arabia and the Emirates and also country around it will pick up in the second half.

Korinne Wolfmeyer

Great. And then if I could squeeze in one more, Michel, I believe you talked a little bit about spreading out that A&P spend over the four quarters versus the typical seasonality we see how should we be thinking about that? Is it really going to be more balanced? Or are we still going to see some heavier spend in the back half? And then how does this play into your operating margin expectations over the next couple of quarters? Thanks.

Michel Atwood

Yes, it's a great, great question, Korinne. I think I've been pretty consistent about the fact that we wanted to avoid some of the things that we've done in the last couple of years where the sales comes in higher and when we don't have enough runway to dispense the A&P and get it all why we have built into our financial plans on a lot more upfront spending in order to build the momentum that the market is strong.
Our brands are doing great with great innovation. So really the idea is to is to capitalize on that end of end to end to front spend. To answer your question we are we have historically probably spent of 45% of our A&P or 40% of our A&P in the last quarter.
We're going to continue to have a pretty high spending. We're looking more for about 35% of our spending. And then it'll be it will be spread out a little bit more even evenly over quarter two and quarter three. So Q1 will continue to always be a lighter quarter in terms of spending, I think our spending was really, really, really, really low, and we did it to rebalance that.

Korinne Wolfmeyer

Great. Thanks so much.

Michel Atwood

Thank you.

Jean Madar

Thank you.

Operator

Ashley Helgans, Jefferies.

Ashley Helgans

Thanks for taking our questions. And I'll just start just start on the energy cost inflation is expected to be an impact or something that came about throughout the quarter?
And then just another question on the potential price increases can you remind us the last time you took price and correct me if I'm wrong, but if your competitors maybe like Cody were a little bit more aggressive with pricing this last year and you guys kind of stopped taking price kind of midway through last year. Thanks.

Jean Madar

Michel, you want to answer the first part?

Michel Atwood

Yes, sure. Sure. (multiple speakers)
Hey, Ashley, no, we I mean the cost of goods, most of the cost of goods inflation basically came in 2023, primarily driven by the higher cost of energies, which drove up the cost of glass bottles, particularly and in Europe.
It wasn't really a big surprise for us and to see some of those costs coming through it. Typically, you know, as you've seen, we have about nine months of inventory. So some of this stuff kind of will be coming will be kind of coming through I think in the last couple of quarters, it was hidden by the fact that our we have there's also some, I would say, on channel mix and our US business is growing much faster.
As you know, we have a more direct business in the U.S. So the gross margins are higher there and that part of the business was growing a lot faster. So it was kind of hiding it was hiding a bit of some of that cost inflation that was kind of making its way.
So not really a surprise I know it's a big number, but at this point in time, we're still very confident that we're going to hit our gross margin numbers for the year and be more or less flat versus flat versus prior year. We were always expecting some cost inflation. And in terms of and I'll let Jean basically cover off. I thought that covers off your question on COGS, and then I'll hand off to Jean on the pricing piece.

Jean Madar

Yes, Ashik, we have to do. Yes in. Thank you for asking this question because the data has been very, very good careful about the price increase in the last 18 months whenever we put the void, the price increase we did.
And I think within we did the right thing but that's true that certain brands I want to be positioned at two at a more premium level and three key goals. And frankly, I'm thinking of Shraga more. So this is where we think we have for certain products on certain brands, the possibility to tubal to adjust to the retail price. But it's not at all, not at all a price increase like other people.

Ashley Helgans

Great. Thanks so much.

Jean Madar

Thank you.

Operator

Hamed Khorsand, BWS Financial.

Hamed Khorsand

Hi.

Jean Madar

Hello Hamed.

Michel Atwood

Hello Hamed.

Hamed Khorsand

Right. So the first question I had was regarding your top 5 or top 10 brands. What dependent are they on new fragrances are to your gross sales versus more traditional established fragrances?

Jean Madar

Michel?

Michel Atwood

Overall, it's great question now that, you know, overall, it's about a it's about balance, right? I mean, obviously, this is an industry where you have a pretty high pace of innovation and newness is important and you need to have a good balance of newness to keep the brand fresh This being said, newness can come in different ways. I can always use the great example of Chanel.
Number five, you know, it's been out there for 50 years and it's been able to stay fresh, not necessarily with product newness, but with commercial newness. And we've had advertisements like Brad Pitt and stuff like that. So you don't necessarily need a product newness to keep the brands fresh, our unique strong heroes.
And that's one of the things that we're clearly trying to build. And if you look at some of some of our larger our larger brands. We are building strong Hero, a pillar mindset that we can leverage and build over time. And now newness can have some impacts on pipeline.
And you are typically where it comes out, but it but in the form of consumption, I think you can certainly build your brands up with a with a with a good product and a strong brand without necessarily having a massive amount of newness because you need to keep the brand fresh as all.

Jean Madar

Yes. Yes, I totally agree. We need to have a balance and sometimes it's quite to solvency imbalance between and QO. is a blockbuster or new peanuts that we shortened the brand. We do every say, every two years, but every year we have in order to keep the newness and another deep, we have to add the line extensions or to pull in our no language in tankers.
But we this is the nature of the business. So you have the in the portfolio and existing in in the Eurozone and do every year we come up with the extension of a key and of course, different districts, so on stream and the Christmas season. And but I don't see that we are dependent to the seasonal nature of the business decision. We build our model.

Hamed Khorsand

Okay. So you're not really seeing consumers just buy the brand, new fragrance dried out and then move on to the next one, right. That's not what you're saying now.

Jean Madar

Naturally, I think that I see that we are more open to trying new things, but to them. But right now, we have we have been you have players in our portfolio that have been in the portfolio for more than 10 years and they and they still sell and we still grow.

Hamed Khorsand

Okay. My last question was regarding your ad spend. Are you doing anything different as far as the advertising, particularly, is it different strategy other than the spending using different avenues for online?

Jean Madar

Of course? Michel, you want to answer regarding (inaudible)

Michel Atwood

I mean overall line? Yes, I mean, overall, as you know, that we know most of the advertising and promotion has shifted into the digital space. I mean, we typically every brand has a different cost point prospect and no different to the consumer.
And we tried to tailor that. But most of our advertising and promotion is in digital. And um, and we've just basically been put in more GRPs, Mio spend more dollars as opposed to a as disposal. We are spending on new avenues. Jean?

Jean Madar

Yes, absolutely. You seem to it.

Hamed Khorsand

I appreciate it. Thank you.

Jean Madar

Thank you.

Operator

Thank you. We've reached the end of our question-and-answer session. I'd like to turn the floor back over to Michel for any further or closing comments.

Michel Atwood

All right. Well, thank you for joining our call today. Before I end the call, I would like to announce a few upcoming events, IoT, both in Chicago and Milwaukee later this month with Piper Sandler and Jean will be in grass with Jefferies at the end of the month and in June.
I'll also be in Nantucket with Jefferies at their annual consumer conference. If you're interested in attending these events, please reach out to your respective their respective sales representatives. If you have any additional questions, please contact Kieran Daly from the Equity Group, our Investor Relations representative for telephone number and email address can be found on our most recent earnings release. We look forward to the next conference call, and thank you again and have a great day.

Operator

Thank you. That does conclude today's teleconference webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.