Greetings, and welcome to the Inter Parfums’ Fourth Quarter and Full Year 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [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, Jesse. 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 euro. 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…

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 all 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 two 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 of 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 welcome a well-coveted and aspirational brand to a 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 outwear collections marries extreme demands of nature with those of city life expressed on the Moncler website. The…

Thank you. We will now be conducting the question-and-answer session. [Operator Instructions] Our first question is coming from Linda Bolton-Weiser with D.A. Davidson. Please proceed with your question.

Hi. 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 what you expect in 2021? Thanks.

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 make-up, 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. We 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. In our internal plans, we do not expect this to happen before 2023 or 2024. Regarding how much – travel retail used to represent around 15% of our total sales and it was down 80%.

Thank you. 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 comparisons, so that'll be very, very strong growth. But do you – like, are there any other launches in first quarter other than the Kate Spade, for example?

Yes. We have the Jimmy Choo which started at mid-season. We did in January for first-time-ever a $1 million at retail in one week 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 $650 million.

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 rollout through 2021.

We have Rochas girl that we launched during this quarter, during this month. Next quarter, we have Explorer product. So it's quite good – 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 whole new line of Lanvin. So it's really almost every month we have something happening.

Thanks. 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?

So 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 is 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 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.

Okay. Thank you very much.

Thank you, Linda.

Thank you. Our next question is coming from Wendy Nicholson with Citigroup. Please proceed with your question.

Hi. I wanted to go back just in terms of – you were saying, remember the Chinese consumer, I think not to a 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 terms of brand launches in Asia specifically?

Yes. Thank you for this question. I think it's is very important to mention that even though the travel retail is not what it was, the Chinese consumer is buying more and more fragrances. Our rate of the 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 Abercrombie. We are definitely target that is buying and engaging actively with our brands in China.

Got it. And then – yes, go ahead.

Excuse me. Russ wanted to add.

The only thing I would 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 our 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 over-spend 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've 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 are 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 number two fragrance website in France, maybe going to the number one 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 two 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 is 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 two retail concepts into Kohl's and Target, do you anticipate participating with that expansion across your portfolio or 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?

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 will be more beneficial for us because we have more brands at Ulta, almost all our brands are carried by Ulta, whereas Sephora, especially in the U.S. is more meant for makeup and skincare.

Got it. Okay. That's very helpful. Thank you so much.

Thank you.

Thank you, Wendy.

Thank you. The next question is coming from Steph Wissink with Jefferies. Please proceed with your question.

Thanks. Good morning, everyone. Russ, a question for you just on the P&A. I think you mentioned in the fourth quarter 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 toward 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 Russ 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? Thank you.

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 know, 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 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 pick up 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, we need to invest in media, we need to invest in the 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 well is it to invest millions of dollars in the TV in Russia, if the stores are closed. So this was the kind of the very simple reaction. Now, we know that advertising accelerate sales. So even though we are not in the 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, gift with purchase, the Bouchard 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 six months actually. Now, your second question on 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 had 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 become stores and e-commerce operation, GUESS has finally guess.com, GUESS has Tmall store, Anna Sui is on the Tmall. So we participate through our licensor and our brands. We participate through the e-commerce sites. But of course, we do also business with Amazon and with other platforms. Did I answer your question?

You did. Thank you very much.

Thank you, Steph.

Thank you. Our next question is coming from the line of Hamed Khorsand with BWS Financial. Please proceed with your question.

Hi, the first question I had was just given the amount of sales that occurred right towards the very end of 2020. 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?

It's a good point. I think that the inventory was very low when we entered the season. September-October, the 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 to almost at record levels. So it's a combination of low inventory going into last year 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 their sell-through started to happen, they needed to replenish their shelf. 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 in almost every one of the brick-and-mortar companies that we sell have an online presence. And that business continues…

Sephora.com, Macys.com.

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

Okay. And then the other question I was just more of follow-up here is, given that what you're talking about what happened in Q4, how 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 and fragrances?

We show our – 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 see toward 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 I think a range of $600 million to $610 million to now $650 million, $660 million. This is all a function of what we've been seeing over the last five or six 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.

Okay. Thank you.

Thank you so much, Hamed.

Thank you. 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.

Well, thank you again, Jesse, and thank you all for tuning in to our conference call today. As usual, if you do have further questions, I can be contacted by email. And please stay well, stay safe, and thank you for joining us today. Goodbye.

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