Q1 2021 Inter Parfums Inc Earnings Call

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Greetings and welcome to the Inter Parfums, Inc. First quarter 2021 conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.

If you would like to ask a question. Please press star one on your telephone keypad, if anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.

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.

Our annual report on form 10-K for the year ended December 31st 2020.

And the 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.

We are primarily talking about sales of prestige fragrance products.

Conducted through our 73% owned French subsidiary Inter Parfums SA.

When we discuss our U S. Based operations, we are primarily referring to sale of prestige fragrance products.

Duct it through our wholly owned domestic subsidiaries.

Of note the average dollar Euro exchange rate for the 2021 first quarter was one point too.

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 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.

Well 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 choose I want you.

And Kate Spade signature scent as well as Roche us 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 five 1% from the current first quarter and.

And as a percentage of sales SG&A 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.

But 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.

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.

By way of comparison, if we go back to 2018 in 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, our 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 Rochelle fashion trademark following the January one 2021, signing of a new license agreement, which modified our Roche us 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 Inc.

Including approximately 294 million almost $300 million in cash cash equivalents and short term investments.

We had a working capital ratio of more than four to one 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 reflects very strong collection activity as days sales outstanding is down to 71 days.

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.

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 John Murdoch.

Thank you Russ and good morning, everyone.

In the current first quarter all regions, except we're still in Europe produced comparable quarter of growth.

Sales in North America, and Asia, Rose, 56%, and 34%, respectively, while you're still in Europe, Middle East and Central and South America sales increased to 125%, 32% and 22% respectively.

Yeah.

While there has been some recent improvement during much of the first quarter. The result jumps of COVID-19 infections and were still in Europe forced certain closures lockdowns.

In France, U K and although restrictions the depressed since we've brought the vaccine distribution restriction shoe debate overtime, just as we have here in the U S.

While our travel retail duty free business, which historically represented between 15 and 20% of our WAF since has not as.

Yet the bonds back much of it lost business was offset by increasing internal medicines.

While we don't conduct an equal amount of Iraqi retail test in those.

Our products are sold across multiple and done it. That's from these includes department stores website like Macy's does become mega websites like Amazon Latimore.

Website of beauty stores, like Sephora Dot com and the websites of our license or like Montblanc.

One final point worth mentioning about says.

New product launches all general you're very predictable since get them leased but twin established sense fueled sales growth a return on investments in product development package, Inc. And advertising is greatly enhanced.

Which is why we're gratified with low on Nova brand.

Rose, 27% and 91% for Nova we've increases attributes attributable to legacy.

While growing our existing brands and all that entails is job number one 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 jumpstart the fragrance franchise.

Well of course, we tend not to make any promises, but new license agreements will be signed.

This is a high priority for us.

Just as we are pursuing desirable names well being courted by civil read on this because it's not that far he isn't that attractive partner, we're small but not too small so that we are able to devote our attention and resources necessary to grow license source fragrance business.

We have a very successful track record in brand building expertise as well as the distribution network, which encompasses Hollywood in 20 countries and has a depth of knowledge in their local markets.

We have global sourcing expertise and quick reflexes that helped us weather related issues.

Just in tariffs political turmoil natural disasters and although production obstacles.

[noise] from early 2022, our new Paris headquarters will be operational thus, giving us greater brand capacity on the hand enhanced.

Global emissions of our teams.

As we reported the rollout of products launched in the first quarter to quarter is continuing.

Including <unk> gone to the hunt that'd be lovely depth, I'll guess, the new MCM fragrance, a new Hollister fragrance and the Jimmy Choo.

A new product called I won't shoot and Russia as Gil for European operations.

Brand extensions dominate our new product pipeline for the remainder of the year, including flank gifts from mobile.

Explore low coach dreams, and Jimmy Choo.

Zero for European Operation.

Well as we've additions to Scarborough, the Honda day last time U D, but who do you still with COVID-19.

Clearly something Jacques pillar for our U S operations.

This is a good time to remind me someone else. That's when we develop flankers we build upon on our strong sales would your expectation of extending the life of the name I Didnt relevance and extracting fresh buzz we've up the diamond expense of image on your pillow.

Another way to enhance return on investment.

Sometimes a flanker ethics relieved.

As is the case with our best selling novels from loss it could add Apis, which came to the market in 2002, while it's still the original especially if you did $19 27.

And tell you all the new fragrances are planned for the coming quarters as well, including the loans on women's nine new dual flow Abercrombie and Fitch, our new fragrance called Dunhill called reason.

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 and desktop from wood.

Trade zone virtually at the Jefferies Consumer conference on June 22.

So not operator, you can open the floor for questions.

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Our first question is coming from Joe <unk> of Raymond James. Please go ahead.

Hi, guys. This is Adam on for Joe I was wondering if you were seeing and 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 Q1, if you could just kind of.

Put that into context would be helpful. Thank you.

Yes with travel retail is steel.

Uh huh.

Away from them from the level. It was in 2019 as I said in my remarks.

Typically total retail represents 15% to 20%.

We are down 80% from 2020 vs six.

Today, no real improvement in travel retail at least like this one with first quarter, we do not anticipate in our projections with improvement this year.

Great. That's helpful. If I, if I could squeeze in one more maybe just a characterization of.

Channel inventory levels right now are just kind of in terms of what you guys are seeing and that's all from me.

Yeah diverse you won't be too.

Yeah sure China channel inventories from what we from what we're seeing are very very low.

Hum.

Sales of the some of the searches that we've seen in sales at the end of the fourth quarter.

And even into the first quarter.

Fact that that has continued is is telling us that the the retailers are carrying very little inventory almost ordering on adjusted 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.

Great. Thanks, Roxanne congrats on the strong quarter guys.

Thank you kyu.

Thank you. Our next question is coming from Linda Bolton Weiser of D. A Davidson. Please go ahead.

Yes, good morning, Linda Hi, I was wondering about your A&P spending I mean, Russ kind of talked about the you know the anomalies.

The anomalies in 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 are the biggest A&P ratio of the year.

Yes, yes, certainly the answer the answer is yes, we have been ramping up and we have been following the 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 the last three months four.

<unk> three from between three and four months.

Shows you that there is very little visibility out there but.

But the trends are all positive and as we continue to see the trends with sales improving.

With our launches taking oh.

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 a is the heaviest cash.

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 Janney.

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 helped you at all.

So the Virginia, we are generally with strong February was even stronger than March one so beating our internal projections I a poodle. So there was a stronger than expected so it seems that.

Month after month, we are getting more visibility.

Yeah.

We have the.

Where does it come from my seat in the U S.

He's a he's helping.

Pretty sure of that but it is also.

International trends people are going back to stores and and and all day. So.

I think that's maybe in the second quarter.

Not exactly at the 20 of 21% to predicted.

These what you project usually flow.

I believe zynga for free.

So it's going to happen moving to film and the flow.

But we have raised the Libya, where our guidance of two times.

I don't like to raise guidance every every month, but two but two we oh.

We are quite to actually very comfortable.

Okay, Alright, that's all from me. Thank you very much. Thank you. Thank you. Thank you Linda.

Thank you. Our next question is coming from Wendy Nicholson of Citi. Please go ahead.

Hi, good morning.

First question just on the expense.

Alright door and even all the doors I know support a big fragrance retailer in the U S. Do you plan to participate in the fast enough to warrant the working day.

Two one.

Oh and also into working day target is there any reason you would hold back and not how long have all of your brands.

For some free I think from some of our brands, we will participate in the industry for expansion and that's for all our brands.

And because of some brands pizza fits or will it be sued somebody elses.

So don't.

In general in the U S. We do not see a decrease in Europe.

Distribution.

We think that the amount of dose that we have and again teaser from two.

From one brand to another but we feel that what we have uses such as victory.

Got it fair enough okay.

At a high level you know obviously you guys are so strong in fragrances and you've got so many fantastic license it doesn't it.

You the fragrance industry has been as strong as it has for as long as it has I mean were you know we've been through fits and starts in the past couple of years of growth and then it's low.

It strikes me that that's just the fragrance industry throughout the pandemic even for several years before 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.

You know something that Asian, particularly Chinese I mean, now like to wear but but again.

Anything else you can comment on with regard to that do you see any signs that sort of over saturation over proliferation. So many new brands coming from the market anything you can comment just kind of high level industry wide kind of apart from the pandemic.

I can try I can try to answer it's a very good question, but.

When when we build our portfolio of loans, we all are very careful to.

The woodlands, we select we do not see yes, two in Europe, but you're knocking on the on the door and I think that to be.

Gross all our brands have something to say two to from consumers that they are successful successfully of course at different levels low.

From one another but successful and do.

It is true that a woman will buy them.

Women, who are who have been buying too simple frequents four years, we'd be inclined to to buy a new fragrance. If it comes from our fashion bridal jewelry brand.

Then she likes and that's why Oh.

I assume that to the success of unnecessary are in China.

Yes.

It can be explained we are we're able to.

To convert to the new custom than elsewhere.

Every month.

Cause of <unk>.

Because of <unk> because of the frequency we have.

So I said in my remarks.

We are actively looking for from you in full.

The new license.

Oh, No acquisition I think that we have a structure that we have and with the with the knowledge that we have we can come a day two more months of course, we have to be a.

Great drugs, but two we think that two day went up I think could be moving in Israel, the right partner for from an existing.

<unk>.

That's great. Thank you so much that's very helpful.

Okay.

Thank you. Our next question is coming from Steph Wissink of Jefferies. Please go ahead.

Thank you good day, everyone I just one quick follow up Brad on your comments on A&P has there been any change in the channels and whats your marketing.

At all versus maybe legacy channels, and then secondly, I just wanted to follow up 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 a day more designer driven brand's artisanal brands on anything as you think about the next maybe three.

Three or four opportunities or any of the things since the birth of your prior brand portfolio. Thank you.

Yeah, unless we don't suffer from stuff with a question and I will try to influence accounts.

Yeah, I mean, certainly with respect to the 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 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 are a majority of the expenses are related to that digital content environment, yeah, we'd say around 70% of our spending.

It goes towards your children.

I'll go fishing.

Good day.

Yeah.

Regarding the loans that we'd like to.

Yes.

To sign.

I think today there is that our desktop site has shown that they can do what we can do very well.

We've done that have existing business, but maybe you have not I have not been <unk> looked at we just send the.

Tension between what we have done so.

And we would be looking at Brunswick.

Or would you have to live with all of them around the 50 million don't lose that we can go to the next level. So if he sees a work from.

Here's what we're looking for right now.

Yeah, I don't think I would just add I don't think it's a change from where we historically have gone are we look at names that have withstood the test of time that had been around for many years that really have.

The the potential.

To grow even more with within the platform at the helm as opposed to somebody else.

Low bar model is really the same it states those evergreen type of names that we that we typically look for.

Thank you very much.

Thank you.

Thank you. Our next question is coming from Chris and.

AWS financial please go ahead.

Hi, 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, the two too many times during this conference.

I think he's the ease of insurance.

You take a four.

For non G V T or other brands.

In other words, the base spending advertising youre investing.

For for sales.

Not for today, but flow to move so it should be.

And you stick for us if the business is strong.

Not too low too.

To this day, one of 20%, which is a right to.

18, 19 2021, he's he's the right Dave.

In this month.

She brought to gain market share against the competition.

Well that's.

Yeah, that's exactly right I mean, we we've answered this question several times in the past.

You you have to you have to support the brands.

It's just it protects the future it protects the longevity of the brand staying staying relevant.

When you put it into product into into the market, especially.

Especially today with with more as Sean said, 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 youre going to stop your business. So it's it's imperative.

To continue to invest in your brands.

Okay. Thank you 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.

[noise] no I think that too will vary with engage into the V shear them too.

I do not see net.

You know, we don't choose because I'm really is free to use it.

Free use set.

For US we are all working on 2022 right now because we always will most of them done from us in terms of the presentation.

And the indication of all of this and I repeat very unhappy.

The reason we've.

The sales trend just to give you enough of them.

Uh huh.

India for Us Glenn in Ghana, We just introduced a couple of weeks ago over new fragrance from M. C N and we we sold two three or four times more than what we expected. So so the response is quite it's moving strong them too.

Yeah.

Surprising.

So of course, we have to go back and increase level of inventory and change of this soon.

It seems that the visa big appetite from novel T, especially coming from Egypt and Israel.

But the U S also.

So no we are not going to be yeah.

Programs from this year to next year.

Okay. Thank you.

Thank you Joe.

Thank you 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 email or sell.

Thanks, again for tuning into the call stay well and stay safe.

Yeah.

Hi, 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.

Yeah.

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