Interparfums Inc (IPAR) 2020 Q4 法說會逐字稿

Greetings, and welcome to the Inter Parfums Fourth Quarter and Full Year 2020 Earnings 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, Jessie. Good morning, and welcome to our 2020 fourth quarter and full year 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.

As usual, 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 United States based operations, we are primarily referring to the sale of Prestige Fragrance products conducted through our wholly owned domestic subsidiaries.

Of note, the average dollar-euro exchange rate for the 2020 fourth quarter was 1.19 compared to 1.11 in the fourth quarter of 2019. For the full year, the average dollar-euro exchange rate was 1.15 as compared to 1.12 in 2019. The weakness in the value of the dollar versus the euro has a favorable impact on our net sales while gross margins are negatively affected because over 45% of net sales within our European operations are actually denominated in U.S. dollars while almost all of their costs are incurred in Europe. That scenario played out for the year as a whole but was especially pronounced in the fourth quarter, when the average dollar-euro exchange rate declined by almost 7%.

Moving on to sales. As we reported in January, the final quarter ended with an upside sales surprise, 27% ahead of our implied guidance. While our guidance is usually a bit conservative, the lack of visibility due to the effects of the COVID-19 pandemic forced us to be a little bit more conservative than usual. However, when we affirmed 2020 guidance in November, we did not expect to ship $184 million in the final quarter, approximately $40 million more than the high end of our implied guidance. Fortunately, we had the finished goods inventory ready to ship and make those sales possible.

Beyond the surge in net sales, the fourth quarter of 2020 was an anomaly in other ways, too. Typically, advertising and promotional dollars are heavily weighted to the fourth quarter. In the 2019 fourth quarter, advertising and promotion that was included in selling, general and administrative expenses as a percentage of sales was 29.3%. But in 2020, it was only 21.6%. That was one of the primary reasons why SG&A expenses as a percentage of net sales were 49.5% in the final quarter of 2020 compared to 57.6% in the same period 1 year earlier.

So in the face of the COVID-19 pandemic and the near cessation of business in the second quarter, we finished the year with relatively favorable results. While the 24.5% decline in annual net sales resulted in a corresponding decline in income, we still achieved operating and net margins of 13% and 7.1%, respectively, as compared to 14.7% and 8.4% in 2019.

Some other 2020 notable figures. Cash provided by operating activities aggregated $65 million and working capital items only used $1.9 million in cash from operating activities. Although from a cash flow perspective, accounts receivable declined approximately 10% from that of the 2019 levels, days sales outstanding increased to 86 days in 2020 compared to 69 in 2019. The pandemic put tremendous pressure on many of our customers last year. But we work very closely with them, extended payment terms as needed. And at the end of the day, we did not incur any material losses in connection with the collection of accounts receivable.

Inventories also declined approximately 12% from the prior year. But the decline in sales and the postponement of certain product launches had a significant effect on inventory days on hand, which grew to 277 compared to 224 in 2019. That is mainly the result of the decline in sales. With the recovery in sales in the second half of 2020 expected to continue going into 2021 and when we look at our new product launch schedule for 2021, which Jean will go into much more detail in a few minutes, we believe that our inventory levels are reasonable to support our net sales expectations.

Our balance sheet remains very strong. We closed the year with working capital of $445 million, including almost $300 million in cash, cash equivalents and short-term investments, a working capital ratio of 3.8:1 and only $10 million in long-term debt.

Finally, I'm extremely pleased to repeat what was reported yesterday, namely that we raised our sales -- our 2021 sales guidance to between $650 million and $660 million and are looking for diluted earnings per share to fall in the range of somewhere between $1.40 and $1.45. Our guidance, of course, assumes that the average dollar-euro exchange rate remains at current levels and, of course, that there is no significant resurgence in the COVID-19 pandemic. Of course, our guidance assumes a more normalized expense level, both fixed and discretionary, particularly in advertising and promotion, which usually included in SG&A hovers right around 21%.

Now I will turn the call over to Jean for a closer look at how we are doing and what we are doing. Thank you.

Thank you, Russ, and good morning, everyone. The focus of my discussion today will be on the year as a whole, summing up our performance in the time of COVID, recent accomplishments and then I will move on to our plans and activities for 2021, which I might add, are off to a very strong start.

As you well know, no regions of the world were unaffected by the pandemic. Our business declined in all regions, some worse than others. Two of our smaller markets, the Middle East and Eastern Europe, experienced a 35% and a 40% sales decline, respectively. There was much less damage in our 2 largest markets, North America and Western Europe, which had for North America, 18% decline and Western Europe, 20% sales decline.

Somewhere in the middle was Asia, where year-over-year sales dropped 28%, much of it attributable to the dramatic reduction in air travel, especially international flights and the corresponding impact on the travel retail business. While all brands recorded a decline in sales for the year, there was one notable change in the ranking of our brands as Coach became our second-largest brand in 2020, bolstered by the introduction early in 2020 of Coach Dreams.

To summarize recent developments. In November 2019, we extended our license for both the Abercrombie and Hollister brands. And in January of this year, we renewed our license with S.T. Dupont. As we have reported in June 2020, we welcomed a very coveted and aspirational brand to our portfolio, Moncler, which has all the makings of a superstar. The Moncler brand has accomplished a unique fit in the world of branding. It has merged fashion with high performance. Moncler outerwear collections marries extreme demands of nature with all those of city life, expressed on the Moncler website.

The brand is on a upward trajectory, having added footwear, leather goods, such as bag and backpacks, as well as eyeglasses suite of offerings. In addition to online sales to Moncler e-commerce site and those of other luxury retailers, Moncler products are sold in 219 mono-brand stores plus at 63 store within stores, including duty-free retail. Notably, nearly half of the mono-brand stores are in Asia, where the brand is in high demand. We are extremely enthusiastic about the launch of our first fragrance for the Moncler brand, which is scheduled to launch in the very beginning of the first quarter of 2022.

Also, in June, through our French subsidiary, Interparfums SA, we acquired a stake of 25% in a company called Divabox, who is the owner of Origines-parfums, it's an e-commerce platform for beauty products. As a website of reference for all selective fragrance brands, Origines-parfums is a key French player in the online beauty market. We envision several benefits accruing from this agreement. For one, the website experienced approximately 25% year-over-year growth in 2020, making it an attractive investment. Also, we are working on the development of dedicated fragrance lines and products designed to address specific consumer demand for this distribution channel and accelerate our digital development.

Our new product pipeline is rich. Let me start with our newest brands. Already in distribution is first-ever scent for Kate Spade New York. Maddie Ziegler, the young actress, dancer and model, is the feature face of the brand advertising. The fragrance rolled out to U.S. retail outlets, including Ulta, more than 1,200 doors in January, with distribution in Europe, the Middle East, Asia and Latin America to follow.

Among our new brands, we have MCM that is making its debut with a genderless scent backed by a phenomenal advertising and promotional campaign, inspired by global travel and freedom of movement in a connected world. The launch in MCM stores starts later this month with global rollout as the year progresses. And as I just mentioned, Moncler's new scent will debut beginning of next year.

Our more established brands are adding new scents, both entirely new fragrance families as well as brand extensions. With regard to our larger brands, in the first half of this year, Montblanc is enlarging the Explorer family with a flanker. You will recall that Explorer debuted in 2019 and was a big hit for us. And for the Jimmy Choo fragrance portfolio, the new fragrance I Want Choo for women and the Urban Hero flanker fragrance for men will begin to roll out in the first half. In the second half, we've got an extension for Coach Dreams and an entirely new women's line for Lanvin and Lily.

Our U.S. operations are busy with launches, too. Already in distribution is Anna Sui Sky, and we are extremely pleased with orders to date and consumer response. We have also the Bella Vita women's fragrance that debuted in GUESS stores as well as stores in the brand's major markets, such as Russia and Asia, in the spring for this year with retail distribution in the rest of the world coming later in spring 2022. The GUESS brand is also launching Effect, a complete men's fragrance and grooming collection, beginning of this -- beginning mid-year. Oscar de la Renta new women's fragrance called Alibi debuts later this month in Oscar de la Renta stores and then the broader rollout begins. For both Abercrombie & Fitch and Hollister, we have new fragrance duos set to launch.

As we reported yesterday, our Board of Directors decided the time was right to reinstate our quarterly cash dividend at the annual rate of $1 per share. As most of you know, the Board suspended the dividend in the early days of the pandemic as a defensive cash management measure. Although visibility is still far from being perfect, our Board determined that our company's outlook and resources is more than sufficient to reinstate this cash dividend, which has in the past -- which as in the past is payable quarterly.

After what was simply the saddest year in all our memories, I believe there is reason for optimism in the future, especially with the arrival and distribution of vaccines. That optimism also extend to our business. Our brand portfolio has never been better. Our distribution network and supply chain has been our loyal and helpful partners throughout the past year and now stand ready to resume normalized business level as are we. We have an extremely strong financial position. And yes, we are still on the lookout for new license or acquisitions and other expansion opportunities. I look forward to reporting on our progress in forthcoming releases and conference calls.

So just one last thing before we move to our questions. Inter Parfums will present at the Raymond James Virtual Institutional Investors Conference tomorrow, March 3, and the D.A. Davidson Consumer Growth Conference on March 11.

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

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

Can you talk about what you're seeing in travel retail? Some of the other beauty companies have talked about some growth coming from the Hainan province. Are you seeing any of that? And can you tell us what percentage of revenue travel retail was for you in 2020 and then just kind of what you expect kind of in 2021?

Yes. What we see besides Hainan and the activities there, honestly, it is quite slow for us. Let's not forget that China and Chinese duty-free are strong for skincare and makeup less than for fragrance. So my report on duty-free is that it's still way, way too early to see this business coming back. They are still down 80% or 85% comparing to what the numbers were in 2019. I do not expect 2021 to be a rebound for travel retail. We -- in our internal plans, we do not expect this to happen before 2023 or 2024. So we are far. Regarding the -- how much -- travel retail used to represent around 15% of our total sales and it was down 80%.

And then can you give us some sense of how the cadence of growth of revenue growth should be through the year? I mean, obviously, in second quarter, you have the easiest comparison. So that will be very, very strong growth. But do you -- like are there any other launches in the first quarter other than the Kate Spade, for example?

Yes. We had the Jimmy Choo, which started at Macy's. We did, in January, for the first-time ever, $1 million of retail in 1 week at Macy's, which is a great accomplishment for us. So we have -- the sales for January and February were very good, better than expected already. So I think we will have, of course, a very easy second quarter, a good first quarter. That's why we have been able to raise our guidance to 600 and...

Between $650 million and $660 million. The launches that we have during the year are relatively split throughout the year. As Jean mentioned, Jimmy Choo is in the first quarter. Anna Sui, which actually started at the very end of 2020 is continuing to roll out through 2020 -- through 2021.

And we have Rochas' Girl that we launched during this quarter, during this month. Next quarter, we have Explorer (inaudible). So it's quite -- we have launches quite spread out in first, second, third and fourth. That's quite unusual. But as you know, we have delayed some launches from 2020 to 2021. So we have also in the second semester, we have a new -- a whole new line of Lanvin. So it's really almost every month, we have something happening.

And then finally, can I ask you in terms of your statement about a slight increase in fixed expenses in 2021, are you talking about like in single millions of dollars? Are you talking about in a percentage increase? Can you maybe quantify a little bit more the fixed expense increase?

Well, what I'm really getting at is that there were certain actions that were taken in 2020 in a cash-saving environment. Certainly, not only just the advertising promotion, but even with employees traveling and things of that sort, there's a certain element of fixed expenses that we did not incur in 2020. When you look at our implied margins going into 2021, they are slightly below that, that we achieved in 2020.

Let's keep in mind that we generated almost $40 million more in sales in Q4 than was originally anticipated. So clearly, that helped absorb quite a bit of the fixed expenses that we had. So I'm not expecting the margins -- I'm expecting the margins to decline a little bit. And our guidance implies a small decline in both operating margin and net margin going into 2021.

Our next question is coming from Wendy Nicholson with Citigroup.

I wanted to go back just in terms of you were saying, remember, the Chinese consumer, I think that's a -- to paraphrase your words, isn't as involved in the fragrance category. But it seems to me -- and this is sort of not COVID-related but bigger picture. Do you still see significant opportunity for the Chinese consumer, Asian consumer overall, to continue to increase their consumption of fragrances? Understandably, it would take a very long time to have them consume as much fragrance as European women. But is that still something that you say is a big growth opportunity and worthwhile investing in, in terms of brand launches in Asia specifically?

Yes. Thank you for this question. I think it's very important to mention that even though the travel retail is not what it is -- what it was, the Chinese consumer is buying more and more fragrances. Our rate of penetration, for instance, on Tmall is increasing month-after-month. So we definitely see a trend. We have a young customer eager to buy novelties, American brands, European brands. It could be a Montblanc, it could be Anna Sui, it could be Abercrombie. It's -- we have definitely a target that is buying and engaging actively with our brands in China.

Got it. And then -- yes, go ahead.

Russ wanted to add...

The only thing I wanted to add is that it's one of the reasons why we spend a tremendous amount of money to support all of the new launches that we have that are aimed for the Asian market areas. And as I mentioned in the opening remarks, as we move into 2021, the amount of spending will get back to more normalized levels because you do need to spend money in this market in order to help promote your products and bring it to those consumers.

Yes. We were on the saving -- we were saving some money last year because there was no reason to overspend in advertising. But this year, we need to get back to the levels we were in 2019. And that's what we'll be doing, especially in China with digital advertising.

Fair enough. And then Russ, you and I had talked about the Lily Aldridge partnership and that initiative in the past. But we haven't talked about it for a while. So I just wanted to get an update. Is that initiative still alive and well, less of a priority now? Kind of what's the state of the union on that initiative?

We reported that the results of that partnership did not meet the expectations that we originally had. We are still evaluating as far as what is the right type of asset to put through that kind of an environment. So it's not that we're looking to abandon it. But we do believe that the e-commerce and the digital environment is something that is very, very important to the future. And it's one of the reasons we went into the Divabox acquisition. Jean, did you want to go into some detail on that?

Yes. Divabox is the owner of this website, Origines-parfums, who is today the #2 fragrance website in France, maybe going into the #1 spot soon. In 2020, the website did something like $60 million or $65 million in sales, growing at a very fast pace. The goal will be to be at $100 million in the next 2 years. And the interesting thing, we learned from Lily Aldridge that it's great to create products geared for digital distribution. But when you control the platform, it's even better. So today, we will be creating products or programs especially for our website.

Got it. Fair enough. And then my very last question is just to ask how you are thinking about the new distribution partners. I know Sephora is a very important customer for you, maybe Ulta a little bit less so. But just in terms of the new expansions of those 2 retail concepts into Kohl's and Target, do you anticipate participating with that expansion across your portfolio? Are you being sort of brand-by-brand, product-by-product picky about what goes where? Just kind of the state of play, I'm wondering how much new distribution you think you'll have over the course of 2021.

Yes. For us, the changes in the partnership between Sephora and Kohl's will not impact all our brands. Certain brands are not -- will not participate in this rollout of Sephora into Kohl's. I think that the deal with Target is will be more beneficial for us because we have more brands at Ulta. Almost all our brands are carried by Ulta, where Sephora, especially in the U.S., is more geared for makeup and skincare.

The next question is coming from Steph Wissink with Jefferies.

Russ, a question for you just on the P&A, I think you mentioned in the fourth quarter, it was down almost 800 basis points, 770 basis points. What did you learn from having reduced levels of marketing support? And is there anything that you could carry over into 2021? I know you mentioned that you expect it to kind of step back up towards that 21% level for the year. But anything you learned in terms of composition, ability to drive sales and customer engagement in your brands with a lower level of marketing support?

And then two follow-ups, if I could. The first is on home fragrance. It's not a category we've talked a lot about, but certainly a category we saw outperform in 2020 and seems to have some good momentum into 2021. Is that an area that you would be interested in exploring either through M&A or through leveraging some of your existing brands?

And lastly for us is on some of those brands where you have global partnerships. Any opportunity to build out brand shops on some of the dot-com platforms and/or partner with some of your big brands to ensure that your fragrance portfolio is visible and customers can access it on some of these big franchise or flagship shops on platforms like Tmall or others around the world?

The first part with respect to the promotion and advertising, it's real simple because I think it really -- the experience we gained is it reinforced what we already knew. And that is that you need to spend money to drive your business in markets all around the world. It was a very defensive mode going in and actually postponing certain launches. It didn't -- it wasn't something easy to do. And in some cases, we actually couldn't do it completely. Coach Dreams was already in the works. Once we launched it back in January, February, the advertising programs were already running. So it was very, very difficult to just automatically hold back.

But what we saw as the year went on and as sales started to pick up, we did have to start putting additional dollars to work. We did not expect the pickup in sales to occur as quickly and as rapidly as it did. And that's one of the reasons why that the percentage spend was so much less than what we normally would have. But as Jean said a few minutes earlier, we are going to definitely be back at least to that 21% level. That's what our budgets are calling for. In the markets around the world, you do need to spend money in order to help promote the product and bring it to the different consumers.

Yes. For us, not spending money in advertising is not great news. Because we know that to push novelties, we need to invest in media. We need to invest in point-of-sales promotion. So because we didn't have enough new launches and there was actually nobody in the stores and many stores were closed, so how good is it to invest millions of dollars in TV in [Rochas] if the stores are closed? This was the kind of a very simple reaction.

Now we know that advertising accelerate sales. So even though we are not in a perfect world today, there are still some countries where you have a lot of malls that are closed, stores that are closed. But in a semi-normalized situation, we saw it at the end of the fourth quarter and we saw it in January and February, our sales are picking up because we are back into not only advertising, but it's also the promotion, the gift with purchase, the push-out at the store level, the commission to the girls behind the counters, all these programs that have been a little interrupted, stopped for more than 6 months, actually.

Now your second question on the home fragrances. We do not have a home division. But we definitely are looking at doing home fragrance and candles for some of our brands. We have started the development last year. So we will see these SKUs in our portfolio in the third quarter of this year. Regarding stores and platform, we have already -- our brands have stores and e-commerce operations. GUESS has a guess.com. GUESS has a Tmall store. Anna Sui is on the Tmall. So we participate through our licensor and our (inaudible). We participate to the e-commerce sales. But of course, we do also business with Amazon and with other platforms. Did I answer your question?

You did.

Your next question is coming from the line of Hamed Khorsand with BWS Financial.

The first question I had was just given the amount of sales that occurred right towards the very end of '20, do you know how much of that was sell-through? And how much of it was really just retailers feeling more comfortable in stocking inventory?

No. That's a good point. I think that the inventory was very low when we entered the season. September, October, inventory was very low. We had to ship a lot of orders worldwide in order for the stores to have inventory. We know that the sell-through was very, very good because we saw immediate reorders in January and in February at almost at a record level. So it's a combination of low inventory going into last year's Christmas season, good sell-through, which is very positive for this year. But in general, the retailers are very, very, very conservative and they are buying very carefully.

Yes. Visibility is still relatively low. So when we went into the holiday season with all the retailers having a very low visibility, once the sell-through started to happen, they needed to replenish the shelves, all right, and this is continuing. So everybody is still being relatively cautious with respect to a return to brick-and-mortar-type sales. The online business is fairly consistent. And we are present and almost every one of the brick-and-mortar companies that we sell have an online presence. And that business continues to...

The sephora.com, the macys.com, et cetera.

Exactly. And that continues to become a bigger, bigger piece of the picture.

Okay. And then the other question I had was just more a follow-up here is given that what you're talking about and what happened in Q4, how has that transcended into Q1? Are those retailers buying or giving you indications for your new releases? Or has it just been purely buying your existing established brands in fragrances?

Well, we show -- our new product launches are shown to the distribution network well in advance. So we kind of know what the demand is going to be. And that's one of the things we do in order to monitor our overall production. But as Jean just mentioned that the sell-through, through the holiday season was very strong. And that's demonstrated by the continuing orders that are being replaced in January and February.

So we are basically anticipating a little bit of a continuation of the growth that we started to see towards the end of the year. And this is really the reason -- the main reason for increasing our guidance. And we increased it not by a little bit. We actually substantially increased it from -- from, I think, a range of $600 million and $610 million to now $650 million, $660 million. This is all a function of what we've been seeing over the last 5 or 6 months, including January and February.

And last question, are you seeing any inflationary pressures as far as your input costs are concerned?

Nothing really of any material magnitude. Again, we source our components all over the world. So everybody needs to be in a relatively competitive marketplace. Companies are looking to get back into business. They want to get their factories back up and running to full capacity. So it's actually a fairly level environment out there right now.

We have no additional questions at this time. So I'd like to pass the floor back over to Mr. Greenberg for any closing comments.

Thank you, again, Jessie, and thank you all for tuning into our conference call today. As usual, if you do have further questions, I can be contacted by e-mail. And please stay well, stay safe, and thank you for joining us today. Goodbye.

Ladies and gentlemen, this concludes today's teleconference and webcast. We thank you for your participation, and you may disconnect your lines at this time.