Interparfums Inc (IPAR) 2021 Q1 法說會逐字稿

Greetings, and welcome to the Inter Parfums, Inc. First Quarter 2021 Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

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

Thank you. Good morning, and welcome to our 2021 First Quarter Conference Call. As always, this 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 heading, 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 conducted through our 73% owned French subsidiary, Interparfums SA. When we discuss our U.S.-based operations, we are primarily referring to sales of Prestige Fragrance products conducted through our wholly owned domestic subsidiaries.

Of note, the average dollar-euro exchange rate for the 2021 first quarter was 1.2 compared to 1.1 in the first quarter of 2020. Under ordinary circumstances, a weak dollar versus the euro has a favorable impact on our net sales while gross margins are negatively affected because approximately 50% of net sales of our European operations are actually denominated in U.S. dollars while almost all of their costs are incurred in euro. I will elaborate a little more on gross margin in a second.

But as we reported in April, our first quarter 2021 sales of $198.5 million were far stronger than we had anticipated, running 37% ahead of last year's first quarter and 11% ahead of 2019's first quarter sales, which were $178.2 million. Like the fourth quarter of 2020, the unexpected surge in first quarter sales had a host of very welcome consequences. For U.S. operations, gross margin rose to 53.2% from 52.6% due to better absorption of fixed expenses.

Gross profit margin for European operations rose to 65.5%, up from 63.9% in the first quarter of 2020. New product launches, including Jimmy Choo's I Want Choo, and Kate Spade's signature scent as well as Rochas Girl generated higher-margin sales, outweighing the effect of the weaker dollar on the current first quarter gross margin.

SG&A expense was an anomaly in the current first quarter, basically the inverse of last year's first quarter. Total SG&A expenses increased only 5.1% for the current first quarter. And as a percentage of sales, SG&A expenses were 38% in the current year's first quarter compared to last year's 49%.

For European operations, with sales up 40%, SG&A expenses only increased 4% in 2021. It represented 37% of sales as compared to 50% of sales in 2020. For U.S. operations, sales were up 26% and SG&A expenses only increased 10%, and represented 40% of sales in 2021 versus 46% of sales in 2020. Now this decline in SG&A expenses as a percentage of sales had much to do with sales rebounding more quickly than anticipated. There just wasn't time to activate historic levels of promotion and advertising, which only aggregated $21.8 million or 11% of sales in the current first quarter.

Conversely in last year's first quarter, we were unable to apply the brakes fast enough in the face of the pandemic-related sales decline, resulting in promotion and advertising expense of $28.5 million or 20% of sales. By way of comparison, if we go back to 2018 and 2019 first quarter, promotion and advertising expense as a percentage of sales was right around 15.5%. As we reported, also yesterday, for the full year, we once again are budgeting 21% of net sales for promotion and advertising for the full year 2021.

Income from operations also included a $2.4 million impairment charge on our Rochas fashion trademark following the January 1, 2021 signing of a new license agreement, which modified our Rochas fashion business model. So at the end of the day, our first quarter operating margin came in at 24%.

Our financial position continues to be extremely strong. We closed the first quarter with working capital of $462 million, including approximately $294 million, almost $300 million, in cash, cash equivalents and short-term investments. We had a working capital ratio of more than 4:1, and only $9.2 million in long-term debt.

Although accounts receivable is up 26% from year-end, the balance is reasonable based on first quarter 2021 sales levels. And it actually reflects very strong collection activity as days sales outstanding is down to 71 days for the 2021 period as compared to 85 days in 2020. Also noteworthy, cash provided by operating activities aggregated $32.5 million for the current first quarter as compared to cash used in operating activities of $25.1 million in last year's first quarter.

As we reported last month and affirmed yesterday, we raised our 2021 sales guidance to approximately $700 million, resulting in diluted EPS of $1.65. Our guidance assumes that the average dollar-euro exchange rate remains at current levels and, of course, that there is no significant resurgence of the COVID-19 pandemic.

Now I will turn the call over to Jean Madar.

Thank you, Russ, and good morning, everyone.

In the current first quarter, all regions, except Western Europe, produced comparable quarter growth. Sales in North America and Asia rose 56% and 34%, respectively, while in Eastern Europe, Middle East and Central and South America, sales increased 125%, 32% and 22%, respectively. While there has been some recent improvement during much of the first quarter, the resurgence of COVID infections in Western Europe forced certain closures, lockdowns in France, in U.K. and other restrictions that depressed sales. With broader vaccine distribution, restriction should abate over time, just as they have here in the U.S.

While our travel retail duty-free business, which historically represented between 15% and 20% of our sales, has not as yet bounced back, much of that lost business was offset by increasing Internet sales. While we don't conduct e-commerce directly with retail customers, our products are sold across multiple Internet platform. This includes department stores website like macys.com, mega website like Amazon or Tmall, website of beauty stores like sephora.com and the website of our licensors like montblanc.com.

One final point worth mentioning about sales, new product launches are generally a very predictable sales catalyst. But when established scents fuel sales growth, our return on investment in product development, packaging and advertising is greatly enhanced. That is why we are gratified that Montblanc and Lanvin brand rose 27%, and 91% for Lanvin, with the increases attributable to legacy scents.

While growing our existing brands and all that entails is job #1, we are actively pursuing new license agreements as a way to accelerate our growth with brand owners who are looking for a new partner to jump start their fragrance franchise.

While, of course, we cannot make any promises that new license agreement will be signed, this is a high priority for us. Just as we are pursuing desirable names, we are being courted by several brand owners because Inter Parfums is an attractive partner. We are small, but not too small, so that we are able to devote the attention and resources necessary to grow a licensor fragrance business. We have a very successful track record in brand-building expertise as well as a distribution network, which encompasses 120 countries and has depth of knowledge in their local markets. We have global sourcing expertise and quick reflexes that have helped us weather pandemic-related issues, changes in tariffs, political turmoil, natural disasters and other production obstacles.

Come early 2022, our new Paris headquarters will be operational, thus giving us greater brand capacity and enhanced coordinations of our teams. As we reported, the rollout of products launched in the first quarter is continuing, including Alibi for Oscar de la Renta, Bella Vita for GUESS, a new MCM fragrance, a new Hollister fragrance, and Jimmy Choo, a new product called I Want Choo and Rochas Girl for European operations.

Brand extensions dominate our new product pipeline for the remainder of the year, including flankers for Montblanc Explorer, Coach Dreams and Jimmy Choo Urban Hero for European operation as well as with additions to the Oscar de la Renta Bella family, the Hollister Wave

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pillar for our U.S. operations.

This is a good time to remind listeners that when we develop flankers, we build upon on our strong sellers with the expectation of extending the life of a name, adding relevance and attracting fresh buzz without the time and expense of a major new pillar. Still another way to enhance return on investment. Sometimes the flanker takes the lead as is the case with our best-selling Lanvin fragrance, Eclat d'Arpège, which came to the market in 2002 while its ancestor, the original Arpège, debuted in 1927.

Entirely new fragrances are planned for the coming quarters as well, including the Lanvin women's line, a new duo for Abercrombie & Fitch, a new fragrance for Dunhill called Driven and the men's grooming collection for GUESS. We look forward to reporting on our progress as the year unfolds.

So just one last thing before we move to your questions. Inter Parfums will present virtually at the Jefferies Consumer Conference on June 22.

So now operator, you can open the floor for questions.

(Operator Instructions) Our first question is coming from Joe Altobello of Raymond James.

This is Adam on for Joe. I was wondering if you were seeing more specifically, trends in travel retail, obviously, not a huge contributor right now compared to historic levels. But maybe if you could put it into context, how much it was in terms of Q1 2021 sales versus maybe 2019 of Q1? If you could just kind of put that into context, it would be helpful.

Yes. The travel retail is still far away from the level it was in 2019. As I said in my remarks, typically, travel retail represent 15% to 20%, and they were down 80% in 2020. There is still, today, no real improvement in travel retail, at least it was like this for the first quarter. We do not anticipate in our projections an improvement this year.

Great. That's helpful. If I could squeeze in one more...

Yes you can.

Maybe just a characterization of channel inventory levels right now, just kind of in terms of what you guys are seeing? And that's all for me.

Yes. Russ, you want to answer?

Yes, sure. Channel inventories from what we're seeing are very, very low at the -- some of the surges that we've seen in sales at the end of the fourth quarter and even into the first quarter, the fact that, that has continued is telling us that the retailers are carrying very little inventory, almost ordering on a just-in-time basis. And this has continued from Q4 into Q1. And even as we see going into the very, very beginning of Q2, this trend is continuing. So I don't see any change coming anytime soon with respect to the channel inventory.

Our next question is coming from Linda Bolton-Weiser of D.A. Davidson.

Yes. So I was wondering about your A&P spending. I mean Russ kind of talked about the anomalies and the comparisons. Are you able here, in the second quarter, to get a little bit more ramped up? So are we going to see quite a bit higher year-over-year? And then would we still expect the fourth quarter to be the heaviest in terms of A&P, the biggest A&P ratio of the year?

Russ?

Yes, certainly. The answer is yes. We have been ramping up and we have been following the different launches that we have at different times throughout the year. You will see definitely an increase in Q2. One of the things that really has caused this is we are still in a situation where there is still quite a bit of lack of visibility. Even the fact that we have now changed our guidance on sales twice in the last 3 months -- between 3 and 4 months shows you that there is very little visibility out there. But the trends are all positive. And as we continue to see the trends with sales improving, with our launches taking -- getting very good visibility, we're going to be increasing the A&P throughout the year.

As I said before, we would expect to be at around 21% for the full year. And as usual, Q4 is the heaviest quarter with respect to A&P spending.

Great. And then can you just talk about like the cadence of sales performance through the quarter? I mean, did it start out January being kind of the weakest and then it got stronger? Or was it strong throughout? And also, do you think the stimulus checks in the U.S. helped you at all?

The January -- January was strong, February was even stronger and March also beating our internal projections. April also was stronger than expected. So it seems that month-after-month, we are getting more visibility. Where the -- where does it come from? I think in the U.S., definitely the stimulus is helping. We are pretty sure of that. But it is also an international trend. People are going back to stores and are buying. So I think that maybe in the second quarter, we will not be exactly at the 20% or 21% projected. Russ, is this what you project usually for appraising...

For the full year, yes.

For the full year. So it will happen more in the third and the fourth. But we have raised already our guidance 2 times. I don't like to raise guidance every month, but we are quite actually very comfortable.

Our next question is coming from Wendy Nicholson of Citi.

My first question is just on the expansion of Sephora doors and even Ulta doors. I know Sephora is a big fragrance retailer in the U.S. Do you plan to participate in the expansion of Sephora doors into Kohl's and Ulta doors into Target. Is there any reason you would hold back and not have all of your brands in those new stores?

For some of our brands, we will participate in the Sephora expansion, not for all our brands because some brands fits well in this environment and others don't. In general, in the U.S., we do not see an increase in the distribution. We think that the amount of doors that we have and, again, it is different from one brand to another, but we feel that what we have is satisfactory today.

Got it. Fair enough. Okay. And then just kind of high level, Jean, obviously, you guys are so strong in fragrance and you've got so many fantastic licenses. Does it surprise you that the fragrance industry has been as strong as it has or as long as it has. I mean we've been through fits and starts in the past, a couple of years of growth and then it slows. But it strikes me that just the fragrance industry throughout the pandemic, even for several years before, has just been strong for a long time. And I know we've talked in the past about maybe part of that being the Asian consumer and fragrance is growing really rapidly and becoming something that Asian, particularly Chinese women, now like to wear. But I guess, is there anything else you can comment on with regard to that? Do you see any signs of sort of over-saturation, over-proliferation, so many new brands coming to the market? Anything you can comment just kind of high-level industry-wide kind of apart and distinct from the pandemic.

I can try. I can try to answer, it's a very good question. But when we build our portfolio of brands, we are very careful to the brands we select. We do not say yes to anybody knocking on the door. I think that it's because all our brands have something to say to the consumer that they are successful. Successful, of course, at a different level from one another, but successful. And it is true that women will buy -- a woman who has been buying the same fragrance for years will be inclined to buy a new fragrance if it comes from a fashion brand or a jewelry brand or that she likes.

And that's why I think that the success of Anna Sui in China is -- can be explained. We are able to convert new customers every month because of the brand and because of the fragrance we have.

So I said in my remarks that we are actively looking for new license or new acquisitions. I think that with the structure that we have and with the knowledge that we have, we can accommodate more brands. Of course, we have to be great brands, but we think that today, Inter Parfums could be more than ever the right partner for many existing brands.

Our next question is coming from Steph Wissink of Jefferies.

Just one quick follow-up, Russ, on your comments on A&P. Has there been any change in the channels in which you're marketing, digital versus maybe legacy channels? And then secondly, I just wanted to follow-up, Jean, on your comments on building a more robust pipeline of potential new deals. Any characteristics you could share with us in terms of types of brands that you might be looking at? Are they more designer-driven brands, artisanal brands? Anything as you think about the next maybe 3 or 4 opportunities? Any distinctions versus your prior brand portfolio?

Yes. Russ will answer the first part of the question and I will try to answer the second.

Yes. I mean, certainly, with respect to the type of spend that you're doing on A&P, there is a significant amount of more dollars being spent on digital and social content, making the consumers part of the experience and a movement a little bit away from the traditional magazine or scent strip type of ads. I would say that today, a majority of the expenses are related to that digital content environment.

Yes. I would say around 70% of our spending goes to digital advertising today.

Regarding the brands that we like to sign, I think today that Inter Parfums has shown that we can do very well with brands that have existing business, that maybe have not been looked at with the same attention that we have with our brands. So -- and we will be looking at brands that are already at a level of around $50 million, that we can grow to the next level. So this is our -- this is what we are looking for right now.

Yes. I don't think -- I would just add, I don't think it's a change from where we historically have gone. We look at names that have withstood the test of time, that have been around for many years, that really have the potential to grow even more with Inter Parfums at the helm as opposed to somebody else. But our model is really the same. It's those evergreen type of names that we typically look for.

Our next question is coming from Hamed Khorsand of BWS Financial.

So first question was just on the marketing aspect of it. If you're achieving such sales of 11%, what's the benefit of ramping to 21%?

Well, like I said too many times during this conference, advertising is insurance that you take for longevity of a brand. In other words, by spending advertising, you are investing for sales that not for today but for tomorrow. So it will be a mistake for us if business is strong not to not to go to this level of 20%, which is the right -- 18%, 19%, 20%, 21% is the right level of investment to support -- to gain market share against the competition. Russ?

Yes, that's exactly right. I mean, we've answered this question several times in the past. You have to support the brands. It's just -- it protects the future. It protects the longevity of the brand staying relevant. When you put a new product into the market. Especially today with more, as Jean Madar, 70% of the dollars go into social media. The creation of this content and engaging the consumer is really what is helping to drive the business. If you stop that momentum, you're going to stop your business. So it's imperative to continue to invest in your brands?

Okay. And then the other question was, are there any intentions to delay any releases from this year into next year, just given that it's a robust schedule this year?

No. I think that we are very well engaged into this year, and I do not see and I will not delay any launches. The calendar, it's pretty set. For us, we are all working on 2022 right now because the year is almost done for us in terms of presentation and indication of orders. And we are, I repeat, very happy with the first trend. Just to give you another idea of what's going on. We just introduced a couple of weeks ago the new fragrance for MCM. And we sold 3x or 4x more than what we expected. So the response is quite -- it's more than strong. I mean it's really surprising. So of course, we have to go back and increase our inventory and change our numbers. So it seems that there is a big appetite for novelty, especially coming from Asia, but the U.S. also. So no, we are not going to delay any programs from this year to next year.

At this time, I'd like to turn the floor back over to management for any additional or closing comments.

Thank you. Thank you again, operator, and thank you all for tuning into our conference call. And as usual, if anybody does have any further questions or comments, I can be reached by e-mail or cell. Thanks again for tuning into the call. Stay well and stay safe. Bye.

Thank you.

Thank you for your interest in Inter Parfums and for your participation today. You may disconnect your lines at this time, and have a wonderful day.