Interparfums Inc (IPAR) 2021 Q3 法說會逐字稿

Hello, and welcome to the Inter Parfums Third Quarter 2021 Conference Call and Webcast. (Operator Instructions) As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Russell Greenberg, Executive Vice President and Chief Financial Officer of Inter Parfums. Please go ahead, sir.

Thank you, operator, and good morning, everybody, and welcome to our third quarter 2021 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 31, 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 managed through our 73% owned French subsidiary, Inter Parfums SA. And when we discuss our U.S.-based operations, we are primarily referring to sale of Prestige Fragrance products managed through our wholly-owned domestic subsidiaries.

Back when we announced results for the 2020 third quarter, we were pulling ourselves out of the business abyss of the second quarter following the paralytic measures undertaken to combat the COVID-19 pandemic. Shortly thereafter, we announced our initial 2021 guidance when visibility was extremely poor, as we were faced with uncertainty as to when stores would reopen, when shoppers and store personnel would return, when social distancing requirements would be minimized and when all the other restrictions that we endured during the peak of the COVID pandemic would be lifted. It was lack of visibility, not conservatism when we initially forecasted 2021 sales guidance in the range of $610 million to $625 million. 3 increases later, we are now looking for 2021 net sales of $810 million or about 30% above the high end of that initial range.

Last fall, our initial EPS guidance was between $1.20 and $1.25, and it is now at $2.35. Excluding onetime gains, 2021 will be our best ever year for sales and earnings per share. As you read in the release we issued yesterday, all stars were in alignment for our third quarter. Sales were better than our best expectations. One of the reasons for the surge in third quarter sales was because customers shifted some deliveries from Q4 into Q3. Our gross margin was exceptionally high due in part to a large portion of our sales being comprised of newly launched higher-margin products. Furthermore, advertising and promotion expenses were quite understated relative to the sales levels, and the result was an operating margin of 25.7% in the third quarter.

With respect to gross margins, I will once again make a comparison with 2019, as 2020 was really an outlier year. The year-to-date gross profit margin for European operations was 66% compared to 65% in 2019. This year, we had a large number of new product rollouts for our European operations, including Montblanc Explorer Ultra Blue, I Want Choo by Jimmy Choo, Coach Sunset Dreams, (inaudible), Rochas Girl and Kate Spade New York.

And as I mentioned, our margins are considerably better on several of our new product launches. In addition, sales growth by our European operations was heavily weighted in the United States, where we control the distribution through a majority-owned subsidiary. And therefore, we book sales at wholesale rather than at ex-factory. These 2 factors played a far more important role in expanding our gross margin than the exchange rate did in depressing it.

For our U.S. operations, year-to-date gross margin was 53.2% as compared to 52.3% in the same period in 2019. The 2021 rollout of new products for several of our brands, including GUESS, Anna Sui and Oscar de la Renta and very importantly, MCM, helped boost our margins for U.S. operations.

With the unanticipated and sustained surge in sales through the first 9 months of 2021, reaching our planned spend of 21% of net sales on advertising and promotions means that a big chunk of that investment is being made in the fourth quarter. Since year-to-date, only 14.2% of net sales has been expensed on advertising and promotion.

In the final quarter of the year, we are investing in major promotion and advertising campaigns for our leading brands and new product launches. If you have been following Inter Parfums for any length of time, you will know that we are usually somewhat conservative, conservative in our guidance and conservative in our balance sheet. So for us to invest almost $90 million in TV airtime, print ads, and magazines and flyers, billboards in high-traffic areas, and online and social media advertising, the payback we expect is going to be exponential. Our goal is to accelerate sell-through during this holiday season, setting the stage for large reorders in the new year, all leading to further increase in market share. And we're doing this all at the time when the fragrance category is in high demand.

We closed the third quarter with working capital of $491 million, including approximately $324 million in cash, cash equivalents and short-term investments, and a working capital ratio of 3.3:1. The $126 million of long-term debt relates to our new headquarters for our Paris-based majority-owned subsidiary, Inter Parfums SA, which was financed by a 10-year EUR 120 million bank loan. That's approximately $139 million in dollars. In addition, finally, cash provided by operating activities aggregated over $100 million through September 30 in the 2021 year.

Now I will turn the call over to Jean.

Thank you, Russ, and good morning, everyone. On our second quarter conference call in August, I summed up our message with 3 sentences. Business is booming. Demand is strong. And virtually, all our brands are outperforming what we budgeted at the start of the year.

I cannot say any better on today's call, but what I can add is that we have made 2 important accretive brand license acquisitions that have the potential to accelerate our growth rate even further. I spoke about Ferragamo at length on our last call, but there are a few more points I would like to make.

Ferragamo has been in the fragrance business for a long time and was operated by the Ferragamo Fashion House. If you go on to the Ferragamo website, you will see that in 2019, its fragrance sales were EUR 87 million, around $100 million. That number was slashed in half in 2020. When the Ferragamo family made the strategic decision to go to an outside partner, they chose us. I believe that we earned their trust and confidence because we are committed to understanding and interpreting what the Ferragamo name means.

To preserve existing know-how and experience, stay close to Ferragamo roots and promote the future development of Ferragamo perfumes in observance of the brand values, we are operating the business through a dedicated, wholly-owned Italian subsidiary. We hired about 25 of their employees to work in finance, marketing, operation and sales. And we are manufacturing Ferragamo fragrance in Italy and sourcing most of the components from Italy.

Initially, our focus is on Ferragamo's large suite of legacy fragrance that we are planning to launch a new blockbuster scent towards the end of 2023. We have made the commitment to the Salvatore Ferragamo Group to devote the attention and resources necessary to grow the Ferragamo fragrance business in a selective, luxury distribution framework. We are confident that we can strengthen the Ferragamo business in the Far East, where the name is already highly esteemed and hugely popular; and in the U.S., where the name is well known, but the fragrance distribution is underdeveloped.

Last month, we signed the Donna Karan and DKNY licensing agreement with the brand owners G-III, and this deal will be effective July 1, 2022. The Donna Karan and DKNY brands draw from the energy and attitude of New York City and are powerhouses in fashion and fragrance. With this agreement, we are taking over several well-established and valuable fragrance franchises, most notably Donna Karan Cashmere Mist and DKNY Be Delicious. We also have a new fragrance planned for 2023. Based upon historical sales, these 2 brands should rank among our largest.

A quick review of our business thus far this year. Our largest brand Montblanc, Jimmy Choo, Coach, GUESS and Lanvin generated sales increase of 11% for Montblanc, 39% for Jimmy Choo, 56% from Coach, 44% for GUESS, and 12% for Lanvin. This is the first 9 months of 2019.

Moving on to markets. In our press release, we mentioned that sales in our largest market, North America, are on fire, up 87% compared to the first 9 months of 2019. Gains in Western Europe and Asia were a more modest 6% and 10% compared to year-to-date 2019.

While improving slowly and marginally, international passenger traffic remains curtailed worldwide. With the U.S. now allowing international travelers who have been vaccinated into the country, we may have turned the corner. Throughout most of this year, the biggest challenge we had been facing is a consequence of the COVID-19 pandemic, namely a disruption in the supply chain.

What we are encountering is a component shortage, because our suppliers do not have the sufficient capacity to meet our needs. Also, when they produce, they cannot secure transportation, shipping or trucking to bring the goods to our warehouses. The confluence of the shortfall in capacity and the difficulty finding transportation makes this struggle both extraordinary and complex. And all this is happening, of course, when demand for fragrance far exceeds what we or anyone else had forecasted.

Early in 2021, we anticipated a looming logjam and began accelerating our purchasing. And at the end of the first quarter, we received a fair amount of components, which is enabling us to ship a decent amount of goods in the fourth quarter. Maneuvering as best we can under the circumstances, we have enlarged our inventory, increased our future orders and taking into account longer lead times for components and outsourcing the same components from multiple suppliers. We plan, of course, to carry more inventory in 2022. And when possible, manufacture products closer to where the sales are concentrated. We think Italy will play an important role in this scenario as a point of manufacturing and distribution well beyond our Ferragamo business.

It looks like there may be a light at the end of the supply chain tunnel sometime in the 2022 first quarter, but as of today, it is a very intense problem. Like many of our peers, we are offsetting higher costs with modest price increases in the new year. We haven't raised prices in a number of years. So there has been no blowback from customers.

Our debuting scents for Moncler, Moncler Pour Homme and Moncler Pour Femme will roll out in early 2022 to thousands of doors, accompanied by a full-scale advertising and promotional campaign. I must say that even for Inter Parfums, these are extraordinary products where high tech meets luxury. The refillable bottles take their shape from mountaineering flask and the quilted construction of a Moncler jacket, an LED screen enhances the bottle with an illuminated message panel, customizable via a Bluetooth-powered smartphone app. This innovation allows the buyer to write a personal note that appears in scrolling red letters across the bottles, mirrored facade, when activated by the Moncler logo-shaped push.

I really invite you to look at it in Moncler stores or in certain department stores where the products are today. In advance of the global rollout next year, we selectively previewed the Moncler scent in several hundred doors, including the Moncler boutique and in New York, for instance -- for example, Bloomingdale's, and the sell-through has been overwhelmingly positive.

In the New Year, we have men's fragrance pillar debuting for Coach, GUESS and Boucheron. For Inter Parfums, I see 2022 as the year of flankers as we build upon recent launches and some of our best sellers. We can look for flankers for Montblanc Legend, the Coach women's signature scent, Jimmy Choo's I Want Choo, GUESS Bella Vita, and Lanvin Eclat d'Arpège. Brand extensions are also being readied for our first ever scents for MCM and Kate Spade, which debuted earlier this year. There are several more extensions unveiling across many of our brands. Naturally, the addition of Ferragamo fragrance for the full year and Donna Karan and DKNY for half a year should be a major growth driver in 2022.

While the outlook for our business in 2022 is exceedingly good, there may be further upside as international travel resumes in earnest, supply chain disruptions are largely behind us, and the spread of COVID-19 is under better control.

Before I turn the call over for questions, let me tell you that we will present at the Jefferies West Coast Consumer Conference that's on November 17. We will also participate in Citi's Global Consumer Conference, which is on December 7; and we are also a step on D.A. Davidson Annual Holiday Beauty and Wellness Bus Tour on December 14, I will be present. So thank you, Stephanie, Wendy and Linda for this invitation. And now operator, please open the lines for questions.

(Operator Instructions) Our first question today is coming from Linda Bolton-Weiser from D.A. Davidson.

Congratulations on a great quarter. So I'm just curious about the gross margin and all your comments on the drivers there. It sounds like some of those things will continue in the fourth quarter as well. And sometimes the gross margin is actually lower in third quarter because of holiday gift sets and then higher in fourth quarter. So what do you think the gross margin? Can we see such a strong gross margin in the fourth quarter as well?

I think that to the extent that the -- one of the major increases and the reasons for the increases in the margins was the growth in the U.S. business where we sell direct to the retailers. That is definitely going to continue in Q4. That has continued and been very, very strong all year. Our sell-through at the retail level is very strong. So we're expecting consistent reorders in that regard. So I would think that the margins are going to continue to be high for the rest -- certainly, for at least the rest of this year.

With respect to some of the other gains in margins because of product mix, yes, usually, there is a little bit more of gift set selling in the fourth quarter than there is in the third quarter, but I don't think that, that's going to be outweighed by the gains we're going to see on the retail -- on the sales at wholesale level to the retailers.

Okay. And then is there any way of quantifying how much sales -- how much in sales was pulled forward from fourth quarter into third quarter?

That's really difficult to determine. We really haven't been able to quantify it to a great extent.

What we can say is that this third quarter sales were extraordinary. I was looking at the numbers yesterday before the call, and I asked Russ if it was a record third quarter. We have to go back, I don't know, something like 10 years, when we stopped our Burberry license.

Yes, for sales, it was a record.

Yes. So for sales, it was a record. What happened is quite interesting. As we said in our remarks, the U.S. is really booming because we think that in the last 12 to 18 months, the consumer habits in the U.S. have changed. They used to buy fragrance to wear outside. But with the confinement, they stayed at their home and they use -- they have the facility to buy fragrance online and try different things. So today, we have consumers who are buying fragrance for themselves, and they feel good about wearing them for them. That's the only way we can explain such growth in the fragrance business in the U.S. Not all the segments have been growing that fast. Perfume are definitely the fastest growing segment for 2021.

Yes. To quantify it just a little bit. For the 9-month period, sales in North America for us was up over 87%, which was more than twice as fast as the next highest growing market from a geographic standpoint. So clearly, this is something that -- and that's what makes it a little bit hard to quantify, but it's something that we're seeing that really has been unprecedented in the years past.

And I will add also that to -- on the top of this strong business in the U.S., we saw some long-term changes in our business in China. You -- I don't know if you remember, but we said for a long time that fragrance was never a priority for our Chinese customer. Of course, they prefer to skincare and makeup. But again, there is a change here, and we see a strong, strong interest from young customers shopping fragrance. And we are going to capitalize on that. And that's why if you want, we can speak about it at length, we have decided to spend so much advertising in the fourth quarter, something that is not the normal advertising that you will have expected.

Okay. Sounds good. And then my last question is just on Ferragamo. How is the inventory situation there? And will there be -- is there any way you can quantify or give some feel for how much sales there might be in the fourth quarter?

We have purchased inventory in -- when we signed the license agreement with Ferragamo. There is a sufficient inventory at least for the beginning. The first 3 months of Ferragamo business, which is October, November, December, are going to be transitional months. So I'm not expecting big numbers. The real business is going to start in January.

As Jean mentioned in his remarks, the Ferragamo business was over $80 million back several years ago and was cut in half due to the pandemic, which would imply that on an annual basis, it would be somewhere around $40 million, $45 million. To be somewhere at 20% or 25% of that number wouldn't be unrealistic. So it's really not a material number compared to what our sales are on an annual basis. But as Jean said, the real business for Ferragamo was really gearing up for 2022.

Our next question today is coming from Wendy Nicholson from Citi.

So Ferragamo $40 million, but used to be $80 million. Did you say what the Donna Karan sales were and what you think next year? I know it doesn't start until next summer, but on a run rate annually, how big Donna Karan could be?

We did not say -- Ferragamo was a publicly held company, so their information is public. And Salvatore is a different...

It's a public company, too. We estimate that the DKNY business was around historically in the $100 million when it was at Estée Lauder. Our goal will be to bring it back to this level in the next 2 to 3 years.

Got it. Okay. Wow, that's awesome. That's great. Question on the A&P. I understand you're spending a lot in the fourth quarter, but for the full year, your -- as a percentage of sales, you're kind of in the 21%, which is where you were sort of pre-pandemic, like '17 and '18. So kind of do you think longer term, '22, '23, just generally speaking, is that 21% of sales on A&P kind of the right place to be or given that the business is more global, whatever do you think it needs to be bigger than that?

You're right. Historically, I think it even goes through 2019. We were pretty much at 21% for 3, 4 years in a row. And that included the growth that we had in sales. 21% seems to work for us. It's kind of an internal -- I don't want to say target, but an internal budgeting mechanism that we have. Depending upon certain markets around the world, you spend more in certain territories than you do in other territories. But overall, I think it's going to have a right around that mark. I really don't see it increasing or decreasing it by any sufficient -- by any significant amount.

Next question is coming from Stephanie Wissink from Jefferies.

This is Grace on for Steph. Our first question is on kind of the post-pandemic world. And what do you think the channel mix will look like in the business as we kind of look out the next few years?

Yes, I can try to answer this. Of course, you have -- we have seen a stronger growth of e-commerce sales. For us, in particular, we started with low numbers. So the percentage increase is very high, but the numbers are still limited. We still believe in brick-and-mortar distribution, and this is where we are spending for this quarter a lot of money with beauty consultant, with sampling, physical sampling, because we want people to smell our fragrance. We are also spending money in digital advertising on websites. And what I think is we're going to see finally a comeback from the duty-free market. The travel retail is going to come back.

We have even started to buy some advertising in airports. And I did that not a long time ago. I took this decision 3 months ago. And I think we did it at the right time because we benefited from some good rates. And we are going to see, from next month until the next 2 quarters, a very nice increase in the travel retail. So -- and we have the right brands for that. We are -- and that's why we want to spend so much in advertising in the fourth quarter.

That's helpful. You spoke a little bit about it, but just kind of double-clicking on the marketing mix. What are you seeing in terms of the changes in your marketing mix? And how have ad rates changed relative to prior periods in different verticals?

Well, certainly, the mix is definitely more and more concentrated on the social media aspect. We're doing a lot of work with influencers. We're doing a lot of work with creating content for different customers and different social media aspect. Your traditional magazine type of advertising is definitely on the way down. We do a lot -- we spend a lot on billboards. We spend a lot on physical presence type of advertising.

And on television also. In certain markets like Russia, Eastern Europe, TV works. We do also a lot of billboard in the Middle East. But in the U.S., most of our expenses are digital.

Your next question today is coming from Hamed Khorsand from BWS Financial.

So first question was just your expectation on the ad spending for Q4. Is that the time line that you expect follow-on orders in the first half of '22 or more long-term oriented? And how can you measure that actually?

This is an investment into not just Q1 or Q2 of 2022. This is really an investment in our brands, investment in the brands that are in our portfolio. Throughout 2021, the amount of spending was minimal, because our expectations were minimal. We had very, very -- I don't want to call it conservative, but very low visibility as far as where our sales were going to be. Sales turned out to be much greater than expected. As I mentioned before, we've now raised our guidance 3x.

But the brands themselves and to keep and maintain and build market share for the different brands requires us to spend money. So this is really an opportunity to take some of the dollars that we've gained and invest it in the most valuable assets that we have, right? And by putting it into these advertising and promotional programs, we're expecting to not only see growth in sales in Q1 or Q2, but really see a market share change, especially with respect to some of the larger brands and the newer brands within our portfolio.

So we're really kind of taking this -- taking some of these gains that we've had and making an investment in the future. And that's what we're kind of doing. Jean, maybe you...

This is a strategic decision that we have made. Basically, the level of profitability of the company is very high. And we do not need to keep this money, this extra money. We have more than -- like Russ said, we raised 3x already our guidance. So the idea is to, in order to continue the momentum and to accelerate this momentum in 2022, we are going to spend a lot of money in advertising. So our market share will automatically increase. It's quite simple. And we think that the first -- we started this at the very beginning of October. We see -- we follow the results on a weekly basis. We have information on sell-through on -- almost on a daily basis.

And as we have put a lot of merchandise in the stores, because of this amount of sales that we have, we have to make sure that this product sell through quickly in order to get a stronger reorder in first and second quarter 2022.

The last thing I'm just going to add to that is that we've seen recently a huge change in fragrance as a category. And when you look at some of the NPD data, we're seeing growth in the fragrance as a category as a whole far greater than we have ever seen in the past. The fragrance business was always very stagnant. It would grow at 0%, 1%, 2%. Today, we are seeing gains that are far greater than that, and we're trying to take advantage. We are in the fragrance business and a pure player in the fragrance business, and we're trying to take advantage of the growth that the category is seeing as a whole. And I think you see it even with many of our competitors. I think the numbers that are out there and are being reported are far greater than they had ever been before. And we're just looking to take advantage of that.

Okay. And my other question was as far as the duty-free stores are concerned, how much inventory buying could you see in Q3? Is that happening at all to any extent? And are these stores just using inventory from when they were closed?

No, we have no inventory at Q3. We are starting to buy it again. The traffic really came back towards the second part of Q3. It is accelerating very fast. So of course, we are trying to get the hands on inventory. But it's not easy for people, who have not planned this purchase to find the inventory. We have commitments from retailers. We have commitments from our longtime partner, who have been buying on a regular basis. So to find today millions of dollars to support travel retail is not that easy. We will support them, of course, going forward. But it's a good news for the industry to see that people are back shopping in travel retail.

And my last question was, how prepared are you if the retail channel that you've sold into and distributors in Q3 come back in Q4 with new purchases? Can you handle that logistically?

It has been very difficult already in Q3 to deliver these numbers with all the challenges that we have in the supply chain and in transportation. No, we will -- I think that we will not have enough products to support Q4 as big as it was in Q3, but that's why we took a conservative stand for Q4. The important thing for us is going to be the 2022. We need to prepare 2022 with the right amount of inventory, the right amount of investments. So Russ, you want to add something?

No. The inventory levels right now -- because of the surge in sales in Q3, the inventory levels are very low at the end of September, lower than we would have liked them to be. So it is going to be a little bit difficult to meet the demand in Q4. But we are building, especially on the new product lines and the new launches that we have for 2022. So we are sourcing from multiple different suppliers. We have increased our lead times, as Jean mentioned on his remarks. We're taking the steps necessary or the steps that we deem to believe that are necessary in order to have sufficient inventory to move into 2022.

Our next question is a follow-up from Linda Bolton-Weiser from D.A. Davidson.

Yes, just a little housekeeping thing. Usually, in the 10-Q, you give a million dollar amount of advertising and promo spend. This time, you gave like a percentage. I guess I can figure it out, but do you have a particular dollar amount you can give us for A&P in the quarter?

I'm sure we can find something for you.

No. All I disclosed was the 14.2%. So you're going to have to do a little bit of math. So if you want, just call me after and we can discuss it.

Okay. I'll figure it out. And as long as I have you again, can I just ask you, in terms of setting up this subsidiary in Italy, do you have any like plans that you could expand the usage of that organization? Like are there other Italian fragrances? I know some of the big ones are owned already by others, but do you see that you can sort of fold in other fragrances or products into that unit to be managed?

It's a very good question, Linda. Absolutely, our presence in Italy is not only to handle the sales of Ferragamo. It's not only to manufacture products in Italy. It's also to be closer to this market. Italy is a great market for luxury. There is a lot of brands and to have a presence in Italy will make -- we think will help us get in contact with brands that can be potential license for us. So it's definitely part of our plan.

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

That's great. Thank you once again, and thank you all for tuning into our conference call today. Jean and I wish you all a very happy holiday season and the very best for New Year. And as usual, please, if you have further questions, please contact me by e-mail. Stay well and stay safe. Thanks again. Bye.

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