Interparfums Inc (IPAR) 2005 Q1 法說會逐字稿

Good day everyone, and welcome to the Inter Parfums first-quarter 2005 conference call with Mr. Jean Madar, CEO and Chairman of Inter Parfums and Russ Greenberg, Executive Vice President and CFO. At this time, I would like to inform you that this call is being recorded, and that all participants are currently in a listen-only mode.

I will now turn the call over to Mr. Russ Greenberg. Sir, you may begin.

Thank you. Good morning, and thank you for participating in our first-quarter 2005 conference call. If you have not received a copy of the press release we issued yesterday, please contact Linda Latman of The Equity Group at 212-836-9609, and she will fax or email a copy to you.

Before proceeding further, I want to remind listeners that 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. Such factors include -- continuation and renewal of existing license agreements; effectiveness of sales and marketing efforts and product acceptance by consumers; dependence upon -- management, competition, currency fluctuation, and international tariff and trade barriers and government regulation. Given these uncertainties, you are cautioned not to place undue reliance on the forward-looking statements. Additional information concerning factors that could cause such a difference can be found in our filings with the SEC.

For those of you who are new to Inter Parfums, let me briefly summarize our business. 88% of our first-quarter net sales are from producing and distributing prestige fragrances, including a small amount of prestige cosmetics. Our principal prestige license brands are Burberry, S.T. Dupont, Paul Smith, Christian Lacroix, Celine, Diane von Furstenberg, and of as of late June 2004, Lanvin. Additionally, effective April 1, 2004, we acquired a 67.5% stake in Nickel, a men's skincare product line.

Although our Company has its roots in the mass-market and today we continue to produce and sell mass-market fragrances, cosmetics, and personal care products -- it has become a much smaller piece of our overall business, as its sales have been declining, while prestige sales have been increasing over the past year. Our products are sold around the world in some 120 countries.

Our 74% owned subsidiary in Paris, Inter Parfums, S.A. is also a publicly traded company. And 26% of its shares trade on the Paris Bourse. This accounts for most of the minority interest on our income statement and balance sheet. And though still small, the remainder of the minority interest relates to the portion of Nickel, not currently owned by Inter Parfums.

Moving on today's business, I would like to review first-quarter financial highlights. Net sales rose 22% to 71.1 million from 58.4 million. At comparable foreign currency exchange rates, net sales were up 20% for the period. Our prestige product sales increased 29%, while mass-market sales declined 15%, as compared to last year's first quarter.

The first quarter's 29% increase in prestige product sales is all the more impressive when you consider that we operate in an industry that is barely growing. And to achieve these gains, we are clearly increasing our market share.

Gross margin was 57% compared to 49% with the increase primarily due to price increases we were able to push through to our Burberry fragrance distributors. SG&A expense, as a percentage of sales, was 44% compared to 32%. The increase relates to the higher royalties and advertising expenditures required under our new license with Burberry.

Companywide royalty expense aggregated 7.7 million in the current first quarter, up from 3.4 million in last year's first quarter. Similarly, promotion and advertising expense included in SG&A approximated 11.1 million, up from 4.6 million in last year's first quarter. In absolute dollars, Burberry product sales have been increasing. As a percentage of sales, we saw in the first quarter more diversification. The first quarter of 2005, Burberry represented 62% of net sales as compared to 67% for the 3 months ended March 31, 2004.

Income from operations was 9 million compared to 10.1 million last year, and net income was 4.4 million versus 4.8 million last year. Diluted earnings per share were $0.22 compared to $0.23 per diluted share for last year.

Our financial position remained strong. At March 31, 2005, working capital aggregated 129 million, and we had a working capital ratio of almost 3 to 1. Cash and cash equivalents and short-term investments aggregated 49 million. Short-term investments consist of auction-rate securities comprised of preferred stock, which paid a variable dividend rate that is reset every 49 days through an auction process. No realized or unrealized gains or losses have been incurred in connection with our investments in these securities.

Our cash flow statement shows that Accounts Receivable and inventories increased 8% and 2% respectively from December 31, 2004. This is very reasonable considering that net sales for the current first quarter were up 22% from last year's first quarter and were up 10% compared to the fourth quarter of 2004. Jean Madar, our Chairman and CEO, will now provide a general business overview and some of our plans for the remainder of the year, as well as a peak into some of our plans for the following year. Jean?

Thank you. Good morning everyone, and I want to thank you as well for your participation on our conference call. Burberry fragrances continued to perform well, fueled by the continued geographic roll out of the Burberry Brit men's line and Brit Red. But we are at the end of the first quarter, we had initial sales of Celine Fever, our newest fragrance family under the Celine brand.

In addition to organic growth from our established brands, the first quarter of 2005 included $7.6 million of Lanvin products and 1.9 million from sales of Nickel products, our men's skincare line. As Russ mentioned, we have some progress to report with respect to the initial stages of our new business model for Burberry. The price increase to distributors, as well as price concessions from our suppliers, have been enacted. But the supplier concessions won't be felt until later in the year, as we cycle through our inventory. The biggest change should be felt, as we restructure our Burberry fragrance distribution, which is expected to begin late next year. We plan to form joint ventures of Company-owned subsidiaries in 7 territories, which combined will present about 40% of Burberry fragrance sales.

So we have new products launching later this year, including a new Christian Lacroix fragrance this summer. And before year-end, we plan to have our first Lanvin fragrance called "Arpege Pour Homme" on the market. For the 2005 holiday season, a limited edition Burberry Brit Gold will be launched at Burberry stores and select specialty stores in major markets.

As we reported yesterday afternoon, we have a very ambitious -- perhaps our most ambitious new product pipeline in the works for 2006. The timetable is still fluid, but I will share with you what we now have planned.

As many of you know, most of our brands are not global. As for example, Burberry is. While brands like Celine, Lacroix, S.T. Dupont and Paul Smith are getting traction beyond their respective core markets, fragrance follows rather than leads designer recognition and brand awareness. Thus, we have generally focused fragrance distribution of these brands on both regions of the world where the fashions and accessories are well-known.

Inter with Lanvin, we have a second global brand. And in 2006, a new Lanvin woman's fragrance is planned for launch and worldwide roll out. There has not been a new Lanvin fragrance for a woman in many years, and we have great expectation for this launch in 2006.

In 2006 or so, we plan a worldwide launch for a fifth Burberry fragrance family with products for both, men and women. This will be very important -- will be very most important launch for us in 2006. But also for men, we have new scents in the works for S.T. Dupont, Nickel and Paul Smith. For women only, we have Christian Lacroix fragrance for women in the works. Additionally, we are formulating products and marketing strategies for an expanded cosmetics and skincare business, drawing upon our existing brands.

Before sending the call to questions, I would like to mention or to remind you that last month, Inter Parfums took home five FiFi Awards at our industry's most prestigious event, the Annual U.S. Fragrance Foundation Awards. We won the two men's fragrance awards for Burberry Brit for Men and for Paul Smith London, the first in the Luxe category, given to the best men's fragrance sold over 250 doors. And later, in the Nouveau Niche category, which is for products sold in under 250 doors. Burberry Brit Red won the best women's fragrance in the Nouveau Niche category, and Burberry Brit for Men won the best national advertising campaign of the year.

Finally, and this is very encouraging for us, Arpege by Lanvin won the honor of entering the fragrance for la femme (ph), given to the best fragrance sold for at least 15 years but has been revitalized for a new marketing campaign.

So as we reported yesterday, we remain confident that if the dollar remains at current levels, our prior guidance of $218 million in net sales and net income of 15.8 million or $0.77 per share is within our reach.

At this time, Russ and I will welcome your questions. So Operator, you can open the floor for questions.

(OPERATOR INSTRUCTIONS). Linda Bolton Weiser, Oppenheimer.

Can you just comment a little more about your comment about the pricing on Burberry and the concessions from the suppliers? Are you kind of saying that the growth margin could maybe be up even more year-over-year in the second half, as the price concession piece of it comes through?

You'll see, in this quarter, we clearly felt the full impact with respect to the price increase to our distributors because that was put into place in the middle of the fourth quarter. And with respect to the price concessions from suppliers, we are expecting to see some additional improvement, as the inventory gets cycled through.

And let me say that in the first quarter because of inventory that we had when we started the beginning of the first quarter, we couldn't take into account any price concessions from the suppliers.

Yes, because we are on a cycle inventory base.

Okay, so that would be more noticeable than kind of starting in the third quarter or more the fourth quarter?

I would say you'd start seeing a little bit in the third.

Okay. And just in terms of what you talked about on the expansion of your cosmetic and skincare initiatives for next year, can you comment on how much additional spending in the area of advertising and promo or other spending that might be required to do that expansion?

I don't want say all -- to go into too much details on that because we're still working on the plans. What I can tell you is that we have learned from DDF make-up, and we will have beginning of make-up on the Burberry. But it will be in a very small scale to start with. We're not going to start with in-counters or coming up with hundreds of SKUs of make-up.

When it comes to skincare -- because of what we know from Nickel -- we think we have a real opportunity with Burberry to do something with skincare. I don't want to give you dates because we're still working on it.

Okay.

And you know, skincare is a different business than fragrance. On fragrance, you can decide of a launch and gear farther. Skincare takes much more time. You have to make sure that you have the right formula. In our plans for 2005, we have absolutely no sales scheduled. And we have not given yet projections of 2006, so we stay here.

There has been no advertising budget because we haven't really formulated exactly any launch dates or anything along those lines.

Okay. And just one more thing on the cash flow. Russ, do you have a sense of what the operating cash flow might have been in the quarter? It looks like it was positive.

It was definitely positive. I can tell you the exact number. It was positive by -- operating cash flow was $8.5 million versus a use of cash in the first quarter of 2004 of 5 million.

And just the tax rate, it was a little lower than I would have expected. What should we assume for the remaining quarters of the year?

Your tax rate came in at almost 35.2%. I've got to think that as of right now, I don't see any reason why it would change. It should be right around -- in between that 35 and 36%.

Mimi Sokolowski, Sidoti & Co.

I have a couple questions for you. Jean, if you wouldn't mind going over the new families that you have in the pipeline right now for this year and next year for men, women? Would you mind just reiterating them?

Give me 3 seconds. I'm going to go back to that one. All right, let's start with this year. So in 2005, in the first quarter of 2005, we launched Celine Fever, which is a new Celine fragrance. We have already some sales in the first quarter.

In the first quarter also, you have the roll out of Brit Red. Brit Red started in the fourth quarter of last year, all right?

Yes.

Second quarter, no launch scheduled. Third quarter of this year, we have a new Lacroix, the new Christian Lacroix, called Tumulte, which we will start shipping in July, okay?

Yes.

In the third and fourth quarter, you are going to have Lanvin, Arpege for Men launch. And we will launch between the -- an important launch for us, a global launch -- many countries at the same time, similar to what Burberry will launch.

And in the fourth quarter, as I mentioned before, we're going to have Brit Gold, which is an offshoot of Brit that we will introduce for the holiday season like we have done with Brit Red last year. It will be in the Burberry stores and in some selective specialty stores worldwide.

We seize the calendar for this year. I can go down the calendar for next year. I will not do it by quarter. But next year, we have a new S.T. Dupont fragrance. We have a new Nickel fragrance. We will have a Paul Smith men's fragrance. We will have a Lanvin women's fragrance, another Lacroix women's fragrance. And the most important launch will be a whole new Burberry men's and women's fragrance -- but will happen next year.

Okay a whole new family for them.

Yes, which will be the fifth fragrance under Burberry -- the latest one being the Burberry Brit.

Thank you for that. I've got a couple more questions too. Russ, would you remind me of the annual run rates of the Lanvin fragrance and the Nickel business at the time -- or the 12 months prior to acquisition?

The 12 months prior to acquisition on Nickel was about 6 million. And on Lanvin was about EUR20 million, which is around 25 million, $24 million.

And I think I just have one or two more. What was the magnitude of the price increase in aggregate for Burberry?

It varied by distributor. Because each distributor -- when you're dealing with a lot of different countries, your are matching it based on the coefficient to a retail price. So it does vary by country. I could say that it was in a range of between 4 and 7%.

Okay. And the last question I have Russ and Jean is, have you -- would you mind -- I guess stating any internal goals you have as the operating margin for this year, for next year, or talk about gross margin targets? What you think might be realistic?

I think you know it's really -- and maybe it was kind of incidental. But the gross margin and even the operating margin in this first quarter was very similar to the fourth quarter of last year. And a lot of that is dependent upon the product mix.

All right, again, when there is a launch of a Burberry fragrance, clearly it changes some of the mechanics because of the extent of the advertising and required royalties. But on an overall full year kind of a basis, I think that the results for the first quarter were very good. And I think that is a target to try to reach for the end of the year -- would probably be pretty close to where our guidance is.

And would it be too much to assume because of the inventory cycles that you talked about earlier that they could get even better in the second half of the year?

You know, there's always a possibility, but I really don't want to predict anything like that. There is a lot of other variables that go into our business besides just a price increase or a supplier concession. The timing as to when sales are -- are critical. Advertising is always expense that is incurred. So depending upon when you actually spend the funding, it could skew any quarter by a couple of percentage points either way. And that's just the nature of this business.

For example, the Lanvin for Men in the second half of the year could offset -- have an offsetting factor because of advertising, promotional spending.

In a way, it can. So we can't really get that precise. And that's why when we issue our guidance for the year, we are really looking at overall just top line and bottom line. It is very -- I really don't want to get into a forecasting ended quarter-by-quarter or even line item-by-line item. That would not be beneficial for us.

But nonetheless, the first quarter set a pretty reasonable precedent?

Yes.

Shelley Hundist (ph), CL King.

You know, it's appears that sales in the last channel have been declining for you. I am just wondering if you expect that to continue? Or if you're interested in possibly evaluating new opportunities in the mass channel?

As you said, the sales have been declining consistently, I would say.

Last year.

For the last 4 quarters. We anticipate sales to continue to decline to a rate similar than it does decline in the first quarter. We have come up with (technical difficulty) especially in the end of third and beginning of fourth quarter, we've come up with some new products. But in general, we found the market very soft for mass market. You know that the world mass market is very concentrated to dollar stores. We sell millions of pieces to people like Dollar Tree, Dollar General, Family Dollar. And this year, their business has been soft.

What are we going to do to offset that? As we said many times, we don't plan to leave this business. We continue to work hard to try to maintain ourselves. But we want only sales that are profitable. So we will be willing to forego topline if we think that the sales are not profitable because of dynamism (sic) and the strength of our prestige fragrance. We don't need to be bothered with sales that are not at the right margin. So that's all I can say right now. Russ, you want to add something?

I think at the present time, keep in mind that even though the mass business is relatively small, the amount and number of products that we push through the channel is tremendous. And it does give us quite a bit of economies of scale when it comes to purchasing bottles and pumps and things like that. So there is some savings that does even pass over onto the prestige side of our business. Because this material, the components, are purchased from very similar, if not the same suppliers.

And you should leave (ph) a scent. So some of the price concessions that we're able to get, you to -- for Burberry, for instance, you have to take into account that our mass market division is by millions -- tens of millions pieces of glass, pumps, caps, holding carton packaging. So this gives us an edge vis-à-vis the suppliers.

So that is something that you wouldn't want to exit completely then?

Absolutely not.

Right, there is no plans at this point to exit. We are constantly looking for opportunities. But there are no plans at the present time for exiting this business.

And can you just maybe comment on how you anticipate in terms of your U.S. business -- how the impact of consolidation of the departments or industry, how that might affect you?

We're not expecting any impact from this consolidation due to -- number one, the geographic situation -- the way that we obviously did not achieve the number one value international. The U.S., power prestige market, we present --

15%.

15 to 20% of our total sales. Plus, let's not forget that in the U.S. for prestige fragrance, we are working with the distributor by the name of Cosmopolitan, who is a subsidiary of Procter & Gamble. So P&G is actually the one billing the Saks of federated of the world. We are not expecting any impact under this consolidation.

Howard Halpern, Taglich Brothers.

Getting back I guess to the last piece of your Burberry strategy, you talked about the price increase and the price concessions. But the distributor piece, did I hear correctly that is not going to occur until the second half of next year?

Absolutely.

Yes, the end of 2006.

Well, we said that it will happen at the end of 2006.

The main reason for that too, Howard, is if you remember from prior conference calls, the original Burberry license was set to expire December 31, 2006. So all of our contracts with our distributors, none of them went past that date. So that's kind of why -- we will begin some negotiations during the year. We are actually starting some even as we speak. But we are kind of anticipating that by the time it is actually put into place, in some of the countries, we will begin towards the end of 2006.

And I know you don't have a firm timeline on 2006 product launches yet. But the two major launches, will--?

We just --

We just went through with Mimi the complete listing.

Okay, but the timing -- you're going to have them separated throughout the year, the two major launches?

Yes, it will be separated. It will not be concentrated in one quarter of course. I will say, pretty well-balanced, pretty well-balanced between the four quarters.

David Cohen (ph), Midwood Capital.

A couple of questions on the numbers. Cash from operations was up quite nicely on a year-over-year comparison, which is amazing given how much revenue is up. Anything unusual in that? I see for example like a $4 million increase in accrued expenses. I'm curious what that line item is. And are there other similar changes that are unusual that occurred in the first quarter?

It's not so much that things are unusual in this first quarter. I think things were very unusual in the first quarter of 2004. And that really affected what went on at the end of 2003 with the initial launch of Burberry Brit women, where we loaded up with inventory at the end of the year, but our suppliers didn't need to be paid until early in 2004 -- in 2005 -- really had a major impact on our cash flow -- I'm sorry -- where the suppliers had to be paid at the beginning of 2004 -- had a major impact on the cash flow for the entire year. Because of the decline of Accounts Payable.

Here in this first quarter, we really had no major launches. We were continuing the launch of Burberry Brit men, Burberry Brit Red, Celine, which is a relatively smaller launch, localized in certain markets. There was really nothing of any great unusual nature. I think that the cash flow was a little higher than what would normally expect but not that far off.

The 4 million that you mentioned about the --

Accounts payable and accrued expenses, there is nothing unusual in any of them.

Your answer certainly explains the payables. But is there anything elsewhere in the P&L that affects accrued expenses that that's gone up by the 4 million like royalties or something?

Nothing unusual that I know of that I could point my finger to.

By the promo and advertising, which was up obviously, as you guys had forecasted, significantly on a percentage basis -- how is that going to behave throughout the course of the year? Are we likely to see a steady investment across the year? Or is it going to be fairly lumpy? What could we expect out of that is particularly relative to your revenue level?

Okay, Russ will go into more technical detail, but I just want to say -- is by contract. We have a new Burberry contract. We have agreed starting January 1, to spend more money in advertising, and that's why you have this big jump in advertising in the first quarter of 2005. (Multiple speakers) Russ?

Absolutely, more than doubled.

More than doubled.

Is your contract speak to a dollar basis or a percent of sales basis?

Percentage of sales. Everything is in percentage of sales. So what we expect is, we think that what you have seen in the first quarter is going to continue in the 3 quarters of this year when it comes to advertising and when it comes to sortie (ph) royalties, Russ?

Yes, the only time that I think you can see another spike is on a new launch of a Burberry family that required advertising -- is even higher than on a continuous basis of --

On a roll off.

Well, not on a roll off but on a continuous base of sales of a product that was launched more than 6 months ago. So when we do launch I guess it's going to be in 2006, the next major family of fragrance under Burberry, which is near market at sometime during 2006. I think you're going to see a spike, based on the way our contract is written with respect to the advertising, all right? So it could affect it by a couple of percentage points.

Otherwise, I think you're going to see it -- this first quarter is very typical. Because again, there's no major launch, and the numbers are pretty much going by what we had originally projected. And that was that royalties would be almost double, and the advertising and promotion on the SG&A would also be almost double.

And I would like to take this opportunity to say that this first quarter was really for us the first time that we are testing the new model with more royalty spending, with more advertising spending, also with price increase on the other side and concession from supply. I will say that everybody at the Company was not surprised but was happy for the results of the first quarter. This states that we're in the right direction. Like we said before, if the dollar continues at the same level, we can expect to go back to a better profitability than what we had in the fourth quarter of last year for instance.

Okay one final tiny question is -- are the minority interest line -- that is almost entirely the French subsidiary, is that correct -- or relates to the minority interest in the French subsidiary?

That is correct.

And so, why would that be down on the balance sheet from the year-end?

On a currency translation.

So on a balance sheet basis, the dollar actually is higher at 3.31 than 12.31?

Absolutely true.

Jarl Ginsberg, Columbia Management.

It is Jarl Ginsberg. Actually, my questions have been answered. Nice quarter.

(OPERATOR INSTRUCTIONS). Linda Bolton Weiser, Oppenheimer.

Just another question -- I'm just looking at kind of second quarter. And I know you don't probably want to give real specific projections or anything. But being that there is not a big launch -- I guess there is the Celine Fever continuation launch in the second quarter -- but do you think that the robust growth of prestige can continue? Or will it come off a little in the second quarter and then reaccelerate later in the year?

When you're looking at quarter-on-quarter comparisons, you got to keep in mind that a certain portion of the growth is going to come from our existing brands. But we also are going to have growth because Lanvin exists in the second quarter and did not exist last year's second quarter. And Lanvin has been performing extremely well for us. Other than that, I really don't want to get into specifics on the sales, as you know.

So, Operator, if there is no more questions?

There are no further questions, sir.

All right. Again, Jean and I thank you all for your participation on this conference call. And whether you were on the call or listening via our webcast, if you do have any additional questions, I'm always available by phone. Have a pleasant afternoon and thank you.

Ladies and gentlemen, this does conclude our conference for today. Thank you for your participating, and we hop you have a nice day. All parties may now disconnect.