Q3 2021 Inter Parfums Inc Earnings Call
Hello, and welcome to the inter Parfums third quarter 2021 conference call and webcast. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. 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.
My pleasure to turn the call over to Russell Greenberg Executive Vice President and Chief Financial Officer of better performance. Please go ahead Sir.
Thank you operator, and good morning, everybody and welcome to our third quarter of 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 <unk>.
Change 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 sales of prestige fragrance products managed through our wholly owned domestic subsidiaries.
Back when we announced results for the 2023rd quarter, we were pulling ourselves out of the business of this 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 in store personnel would return when social distancing requirements would be minimized and all the other restrictions that we endured during the peak of the Covid pandemic would be lifted.
Yeah.
It was lack of visibility not conservativism when we initially forecasted 2021 sales guidance in the range of $610 million to $625 million.
Three 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 one time gains 2021 will be our best every year for sales and earnings per share.
As you read in the release, we issued yesterday.
Stars were in alignment for our third quarter.
<unk> 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 promotional 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.
Want shoe by Jimmy Choo.
Coach Sunset Dreams, La Florida Zeller.
Longhorn <unk> SaaS 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 have control the distribution through a majority owned subsidiary and therefore, we booked sales at wholesale rather than at ex factory.
These two flat factors played a far more important role in expanding our gross margin than the exchange rate did and 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.
With 2021 rollout of new products for several of our brands, including guests 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 nine 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 expense 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 <unk> for any length of time, you will know that we are usually somewhat conservative.
Sort of conservative in our guidance and conservative in our balance sheet.
So for us to invest almost $90 million in TV airtime print ads in magazines Flyers.
Billboards in high traffic areas and online and social media advertising.
With 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.
In market share and we're doing this all at a time when the fragrance category is in high demand.
Closed the third quarter with working capital of $491 million, including approximately $324 million in cash cash equivalents and short term investments.
And our working capital ratio of three three to one.
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 120 million Euro bank loan.
It's approximately $139 million.
In addition, finally cash provided by operating activities aggregated over 100 million through September 30, and the 2021 year.
Now I will turn the call over to Shlomi.
Thank you Ralph and good morning, everyone.
On our second quarter conference call in August.
Summed up our message with three sentences.
Net is booming demand is strong.
And we actually all our brands.
After forming what we budgeted at the start of the year.
I cannot say any but on today's call, but what I can add is that we have made two important actually Keith brand license acquisition potential.
Potential to accelerate our growth rate even further.
I spoke about silicon more at length on our last call, but there are a few more points that we'd like to make.
<unk> got more has been in the fragrance business for a long time and was operated by the same I got more fashion house.
Onto the <unk> website, you would see that in 2019.
<unk> says, we're at 87 million euro around the $100 million that number was slashed in house in 2020.
When does <unk> got more family, we made the strategic decision to go to an outside partner we choose us.
I believe that we've earned their trust and confidence because we are committed to understanding and interpreting what the name.
Name means.
To preserve existing Knowhow and experience stay close to their moods and promos to the future development of <unk>.
Got more films in the settlements of the brand's values, we are operating the business.
Dedicated whole yield Italian subsidiary.
High yield 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 it.
Initially our focus is on the shotgun was lost suite of legacy fragrance.
Planning to launch a new blockbuster.
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 show I got more fragrance business in selective luxury distribution framework.
We are confident that we can strengthen the <unk> business in the far east with the name is already highly tuned and usually book to Bill and in the U S. We have been and well known with the fragrance distribution.
ZEVALIN.
Last months.
Last month, we signed with Donna Karan and DKNY licensing agreements with the brand owners G III.
And these data.
<unk> even July one 2022.
The Donna Karan and DKNY brands drew from the energy and attitude of New York City and.
Polar houses in fashion and fragrance.
This agreement, we are taking over several well established and valuable fragrance franchises, most notably during that Kevin Cashmere music and.
And DKNY be delicious.
Also have a new fragrance plan for 2023.
Based upon historical sales.
These two brands should rank among our largest.
A quick review of our business, thus far this year.
I'll, just burn Montblanc, Jimmy Choo coach guests and longhorn generates a sales increase of 11% from <unk> 50.
<unk> 59 for Jimmy Choo 56 from coach Fluffy for guests and 12 falloff on.
Versus the first nine months of 2019.
Moving onto markets in our press release, we mentioned that sales in our largest market North America are on fire.
87% compared to the first nine.
Nine months of 2019.
Gains in Western Europe, and Asia, we have a more modest six.
10% compared to year to date 2019.
While improving slowly and marginally international passenger traffic remains just sold worldwide.
<unk>, not allowing international travelers, who have been vaccinated into the country.
After the call now.
Most of this year the biggest challenge we have been facing is the concern is a consequence of that.
COVID-19 pending name.
Namely the disruption in the supply chain.
We are encountering is a component shortage because our suppliers do not have the sufficient capacity to meet our needs.
So when they produce they cannot secure transportation shipping of trucking to bring the goods to our warehouses.
The confluence of the shortfall in capacity.
And the difficulty finding transportation mix, which triggers struggle, both extraordinary and complex.
And all this is upbringing of course when demand for fragrance far exceed what we had.
Had forecasted.
Early in 2021, we anticipated a looming low John 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 seek a decent amount of goods in the fourth quarter.
Maneuvering as best we can unveil. These circumstances, we have launched our inventory increased our CTO all this and taking into account longer lead times for components and our sourcing with some components from multiple suppliers.
We plan of course to carry more inventory in 2022.
And one placebo manufactured products closer to where the sales are concentrated we think Italy will play an important role in this scenario as the point of manufacturing and distribution well beyond our <unk> 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 program.
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 theres been no.
Blowback from customers.
Our beauty <unk> home and mantra will.
We'll rollout in early 2022 to thousands of doors.
Compounded by a full scale advertising and promotional campaign.
I must say that even fall onto Passtime visa extraordinary products, where high Tech Luke.
Luxury.
The refillable bottles take shape from mountaineering flask and liquidity construction of a monk levers that gets.
An LCD screen, and then says with bottle with an accumulated message banana customizable.
Via Bluetooth power smartphone App.
Innovation laws.
To write a personal note that appears in supporting regulators across the bottles minerals first said when activated by the more clear global ship.
Yes.
I really.
I really invite you to look at it in more glass doors in certain department stores, we are a product of today.
In advance of the global rollout next year, we selectively previewed Goodman cliffs in several 100 doors, including the Montclair boutique and in New York.
For example, bloomingdale's and the sell through has been overwhelming.
Positive.
In the new year, we have men's fragrance pillar.
The routine.
For coach guests and reshuffling.
Well not get tougher.
'twenty two.
Year of flankers as we build upon recent launches and some of our best seller.
Can look for flankers for mobile only germs with coach women's signature scents, Jimmy Choo, I won't shoe gears with EBITDA and Lafayette cutoff page.
Brand extensions are also being readied for our first as a central MCM and Kate Spade, which did debuted earlier.
Earlier this year.
There are several more extensions and ceiling across many of our clients.
Naturally. The addition of <unk> will fragrance for the full year and doing that Karen and DKNY for half of the year should be a major growth driver in 2022.
While the outlook for our business in 2022.
<unk> there may be some upside.
National travel resumes in earnest.
<unk> Chan descriptions 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 on November 17, we will also participate in global Consumer conference, which is on December seven and we are.
Stop he.
Davidson.
And also you did 10 witness bus tour on December 14.
President.
So thank you.
The decline in.
In the industrial and communications and now operator, please open the line for questions.
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One moment, please when we poll for questions.
First question today is coming from Linda Bolton Weiser from D. A Davidson your line is now live.
Yes, hi.
Congratulations on a great quarter.
So I'm just curious about the gross margin in all your comments on the drivers there.
It sounds like you.
You know some of those things will continue in the fourth quarter as well.
And sometimes the gross margin is actually lower than third quarter because of holiday gift sets and then higher in fourth quarter. So why 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 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 thats going to be outweighed by the gains we are 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 were pulled forward from fourth quarter into third quarter.
That's really difficult to.
Sure.
To determine we really.
We really haven't.
<unk> been able to.
To quantify it to a great extent.
So we get what we can say that this first quarter says were extraordinary.
I was I was looking at the numbers yesterday before.
For the quarter and they asked US if it was a record third quarter with.
Have to go back I don't know something like 10 years, when we win.
When we start our <unk> license for sales it was a record.
Yeah. So so so for sale.
It was a record of what's happened is is quite interesting.
As we said in our remarks.
Yes.
Yeah.
Booming.
Because we think that.
In the last.
12 to 18 months, the consumer habits in the U S has changed the use to buy fragrance.
Two.
Therefore.
<unk>.
Two were outside the confinement has stayed at their home and to use the proceeds to buy fragrance online and try different things. So to date, we have consumers who are buying.
Fragrance.
<unk> says and we feel good about.
No.
We are in done.
All of them.
The only way we can explain such.
Growth in the.
In the fragrance business undue risk not all the segments have been growing.
Jeff Hume our destiny.
Yes.
<unk> segment for 2021, yes to quantify it just a little bit.
For the nine 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 this is something that and thats what makes it a little bit hard to quantify but it's something that we.
We're seeing that really has been unprecedented in the years past.
And I will add also that.
Two on the top of this strong business in the U S.
We saw some long term change changes in our business in China.
Moshe remember, but.
We said for a long time.
Fragrance was nevertheless priority for China's Chinese customer.
Of course, we prefer to skincare and makeup but again there is a chance here and we see.
Strong strong interest from the young customers shipping.
Fragrance.
And we are going to capitalize on that and Thats why.
She won't be Ken.
Speak about it.
We haven't decided to spend so much advertising in the fourth quarter is something that is.
Not yours of the normal.
I think thats.
You would have expected.
Okay sounds good and then my last question is just on Ferragamo.
How does the inventory situation there and will there be is there any way you can quantify or give us some feel for how much sales or might be in in the fourth quarter.
Got it.
We have we have purchased inventory.
<unk>.
When we when we signed the deal.
The license agreement with <unk>.
There is a sufficient inventory at least two four will begin in the first three months of <unk> business, which is October November December is going to be.
Transitional months, so I'm not expecting.
These numbers are real business is going to stop.
In January.
But as John 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 to $45 million.
To be somewhere.
At 20% to 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 John said, the real business for Ferragamo was really gearing up for 2022.
Okay. Thank you very much thank you Linda.
Thank you. Our next question today is coming from Wendy Nicholson from Citi. Your line is now live.
Hi.
Ferragamo 40, but used to be 80 did you say what the Donna Karan sales were and what do you think next year I know it doesn't start until next summer, but but on a run rate annually, how big Donna Karan could be.
We did not say telecom was a publicly held company. So their information is public.
It will definitely Lauder is different.
Therefore, the company too.
We estimate we estimate that.
DKNY.
Net was around historically.
<unk> million dollars.
When was that.
<unk>.
Our goal will be to bring it back to this level in the next.
Two to three 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.
For the full year.
Yeah.
<unk> sales are 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 'twenty. Two 'twenty. Three just generally speaking is that 21% of sales on A&P kind of the right place to be or given.
Given that the business is more global whenever do you think it needs to be bigger than that.
Youre right historically I think it even goes through 2019, we were pretty much at 21% to three four years in a row.
And that included the the growth that we had in sales.
21% seems to work for us.
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 its going to hover right around that Mark I really don't see it increasing or decreasing it by any sufficient by any significant amount.
Okay got it that's all I had congratulations great. Thanks, so much thank you very much.
Thank you. Our next question is coming from Stephanie Wissink from Jefferies. Your line is now live.
Hi, Good morning. Thank you for the question. This is grace on for Steph.
My 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 they kind of look out the next few years.
Yes, I can try to answer at this moment.
Of course.
Do you have.
We have seen.
Strong growth of.
E Commerce.
Davidson.
Well in particular, we started with low number so the percentage increase is very high.
Bill.
Ltd.
We still believe in the brick and mortar distribution.
And this is where we're spending for this quarter.
A lot of money.
Consistent with the sampling physical sampling because we want people to cement our fragrance.
We are also.
Spending.
In digital advertising.
On websites.
And what.
I think we are going to see finally.
Come back stronger duty free.
The market the travel retail.
Going to come back.
Even started to to buy some advertising efforts.
And I did that not too long time ago, I think the decision three months ago.
And I think we did it the right time, because we benefited from some good rates.
We are going to see from next month in June.
The next two quarters.
This increase in the travel retail so and we have the right brands for that.
And that's why we want to to spend so much in advertising in the fourth quarter.
Thanks, 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 and different verticals.
Well certainly the mix is definitely more and more concentrated on the social media aspect, but we're doing a lot of work with Influencers. We are doing a lot of work with creating content.
Four four.
Different customers and different social media aspect.
Your traditional magazine type of advertising is definitely on the on the 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 TV also in certain markets like Russia.
Still in Europe.
On television.
Yes.
We do a lot of the world in the middle East, but in the U S.
Most of our oil.
Expenses.
Digital.
Great. Thank you.
Thank you thank you Steph.
Thank you. Our next question today is coming from Amit <unk> from Dws financial your line is now live.
Hi.
First question was just your expectation on.
AD spending for Q4 is that right.
The timeline that you expect follow on orders in the first half of 'twenty two or more.
Long.
Term oriented.
How can you measure that actually.
This is this is an investment into not just Q1 or Q2 of 2022. This is really an investment in our brands investment in the in the 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 three times.
But the brands themselves 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 gain and invest it in the most valuable assets that we have.
And by putting it into these advertising and promotional programs were expecting to not only.
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 in making an investment in the future and that's what that's what we're kind of doing John maybe this is a strategic decision.
But we have made basically.
Level of profitability of the company is very high and we do not need to keep.
Keep this money.
We have more than the cost.
<unk>, we raised three times over DIY.
Guidance. So the idea is to in order to continue the momentum and to accelerate this momentum in 2022.
We are.
I'm going to spend a.
A lot of money in advertising, so our market share will automatically increase.
It's quite simple.
Sure.
<unk>.
We think the first we start with this.
At the very beginning of October.
We see we follow the results on the on a weekly basis, we have information on sell through on the mostly on the daily basis.
And as we have we have put a lot of merchandise in the stores because of the amount of services that we have we have to make sure that.
Products improve quickly in order to get.
Strong reorders and assist in 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.
And when you look at some of the NPD data, we are 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 stack. It would grow at 012 percent today, we're seeing gains that are far greater than that and we are trying.
To take advantage, we are in the fragrance business.
A pure player in the fragrance business and we are 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.
We're just looking to take advantage of that.
Okay and then my other question was as far as the duty free stores are concerned.
How much inventory buying did you see in Q3 is that happening at all.
Any extent.
Are these stores just using.
Inventory from when they were closed.
No we have no inventory.
Q3, you got starting to buy again, the traffic really came back to you.
The second part of Q3.
It is accelerating very fast so of course that.
Trying to get their hands on inventory.
It's not easy for people, who have not plan. This purchase to find the inventory we have commitments from the retailers we have commitments from our longtime partner.
Buying on a regular basis, so to find today millions of dollars to support the travel retail.
It is not it's not that easy.
We will ship all done of course.
Sure.
Going going forward.
<unk>.
It's a good news for the industry.
You see that people are shopping.
Total retail.
Okay and my last question was how prepared are you.
The retail channel that you've sold into and distribute distributors that in Q3 come back in Q4.
New purchases can you handle that logistically.
There's been a there's been JBC calls already in Q3 to be reasonable.
These numbers with all the challenges that we have in the supply chain.
Transportation.
No we didn't.
I think that we have enough products to support.
<unk>.
In Q4 as big as it was in Q3, but that's why we took a conservative.
<unk> stands for.
Q4.
Important.
I think for us is going to be the 2022, we need to prepare 2022.
The right amount of inventory write the amount off of.
This months.
So.
Russ you want to accompany that.
Inventory levels right now because of the surge in sales in Q3, the inventory levels are very low at the end of at the end of September are lower than we would've liked them today. 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 2000.
'twenty two.
So we are sourcing from multiple different suppliers we have.
<unk> increased our our lead times as John mentioned on his remarks.
We're taking the steps necessary or the steps that we deem to be believe that are necessary.
Order to have sufficient inventory to move into 2022.
Okay, great. Thank you. Thank you. Thank you Amit.
Thank you. Our next question is a follow up from Linda Bolton Weiser from D. A Davidson your line is now live.
Yes, Hi, just one little housekeeping thing usually in the 10-Q Youll give us 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 corner.
Sure we can find some things for you.
Nine.
Okay.
For the year.
Well I did it already disclosed.
The 14, 2% so you've got you're going to have to do a little bit of math or if you want this call me after and we can we can discuss it.
Okay, I'll figure it out and as long as I have you again.
In terms of setting up this subsidiary in Italy.
Do you have any like.
Plans that you could expand their usage of that organization.
Organizationally like are there other.
Alien fragrances, I know some of them.
Big ones are owned already by others, but.
Do you see that you can sort of follow than other fragrances products into that unit to be managed.
It's a very good question and absolutely.
Presence in Italy is not.
To handle.
As I've said I've got more.
It's not a need.
To manufacture products until it also to be closer to this market with the Liza is a great market for luxury.
A lot of brands.
And to have.
At present.
In Italy.
We will make we think will help us.
Getting contact.
We've done that can be potential license for us differently, but our plan.
Great. Thank you very much thank.
Thank you Linda.
Thank you well thank you Jay.
Yes, I'm sorry.
We reached 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 and thank you once again and thank you all for tuning into our conference call today is.
John 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 email.
Stay well and stay safe Thanks again bye.
Thank you that does conclude today's teleconference and webcast you may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.