Interparfums Inc (IPAR) 2005 Q4 法說會逐字稿

Good day, everyone, and welcome to Inter Parfums fourth-quarter 2005 earnings conference call.

At this time, I would like to inform you that this conference is being recorded and that all participants are currently in a listen-only mode.

Hosting today's conference will be Mr. Jean Madar, Chairman and CEO, and Mr. Russ Greenberg, Executive Vice President and CFO. I will now turn the conference over to Mr. Greenberg. Please go ahead, sir.

Thank you. Good morning and welcome to our fourth-quarter and year-end 2005 conference call.

If you have not received a copy of the press release we issued yesterday afternoon, please contact Linda Latman of The Equity Group at 212-836-9609, and she will fax or e-mail 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 fluctuations; and international tariff in trade barriers; and government regulations. In addition, and with respect to our recorded agreement with Gap, Inc., such factors include approval of new products by Gap and sales and marketing efforts of Gap. 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 Securities and Exchange Commission.

Please let me start by briefly summarizing our business. Most of our current operations -- in fact, 89% of our 2005 net sales -- came from producing and disturbing Prestige fragrances and a small amount of Prestige cosmetics and skin care products. The largest-selling licensed brand in our portfolio is Burberry, followed by Lanvin and Paul Smith. Our other licensed brands include S.T. Dupont, Christian Lacroix, Celine, and Diane von Furstenberg. We also own a 67.5% stake in Nickel, a men's skin care product line. The remainder of our sales is mass-market fragrances, cosmetics and personal care products. Our products are sold around the world in some 120 countries.

Our 73%-owned subsidiary, Inter Parfums 0SA, is also a publicly traded company, and 27% of its shares trade on the Euronext in Paris, which accounts for most of the minority interest in our P&L and balance sheet with the remainder attributable to the portion of Nickel not currently owned by Inter Parfums.

Moving onto today's business, I'd like to review fourth-quarter financial highlights. Net sales rose 3% to 65.7 million from 63.8 million. At comparable foreign currency exchange rates, net sales were up 9.3%.

Higher-margin Prestige product sales rose by 9%, while mass-market sales declined 27%.

Gross margin was 61%, compared to 57%. Price increases obtained from our distributors, cost concessions obtained from certain suppliers, product mix, and lower [Giftwick] purchase promotions all contributed to the higher gross margin percentage.

SG&A expense as a percentage of sales was 49%, compared to 45%. Income from operations rose 8% to 8.1 million from 7.5 million. Net income rose 11% to 3.9 million from 3.5 million. Diluted earnings per share were up 12% to $0.19, compared to $0.17 in the prior period last year.

For the year as a whole, we achieved record sales of 273.5 million, up 16% from 236 million. At comparable foreign currency exchange rates, net sales for 2005 were up 17%.

Prestige product sales rose 22% for the year and as I mentioned, represented 89% of consolidated sales, while mass-market sales declined 18% compared to 2004.

Gross margin was 58% for the year, versus 52. SG&A as a percentage of sales was 46% in 2005, compared to 38% in 2004.

Total royalty expense included in SG&A aggregated 27.1 million in 2005, or about 30% more than the 20.9 million in 2004.

Promotion and advertising increased 87% to 40.8 million for 2005, as compared to 21.8 million in 2004.

Net income was 15.3 million or just 3% below 2004's 15.7 million. Diluted earnings per share was $0.75 in 2005, as compared to $0.77 in 2004.

There are several issues worth raising at this point in the call. Our final quarter and the full-year results as a whole was better than we had projected in our earlier guidance. The fourth quarter marks the resumption of comparable quarter growth in operating income, net income, and diluted earnings per share, and our better-than-anticipated profitability was achieved despite higher promotional advertising expenses in the fourth quarter, versus 2004, as well as approximately 1.4 million in fourth-quarter Gap and Banana Republic start-up expenses.

At December 31, 2005, working capital aggregated 131 million, and we had a working capital ratio of 2.9-to-1.

Cash and cash equivalents and short-term investments aggregated 60 million, and borrowings under our credit lines are nominal, as we have historically supported our growth with cash flow from operations.

Now, I will turn the call over to Jean Madar, our Chairman and CEO.

Good morning, everyone. Like Russ, I want to thank you for your participation on our conference call.

We have a large number of new products launching in 2006. The first is under the largest brand in our portfolio, Burberry, for which fragrances have increased at a five-year compounded annual growth rate of 26%. Burberry London for Women made its debut in February. In the UK, we launched exclusively at Selfridge's, and in the U.S., we are launching with top specialty retail stores such as Saks, Bloomingdale's, Bergdorf, Nordstrom, Neiman's, for a total 400 [doors].

If you were watching the Academy Awards on Sunday night, you saw the Burberry London spokesmodel Rachel Weisz win the Best Supporting Actress Oscar. I hope some of you will visit Burberry's Web site to see the new bottle design, which features a heavy glass bottle that is covered with a swatch of Burberry check fabric, as well as some of the print adds. There is a TV commercial plan for the fourth quarter. Later in the year, the men's version of Burberry London will be launched.

On the subject of Burberry fragrance distribution, by the end of this year, one or perhaps two countries should have joint ventures of company-owned distribution in place. The remaining four countries where we envision a change in the distribution will all likely would not be finalized until 2007.

While we had great expectations for our Lanvin fragrance, when it became an Inter Parfums brand in mid-2004, the reality has far exceeded our expectations. Sales of Lanvin totaled 35 million in 2005. Interestingly, new product introductions were not the catalysts for sales growth as Arpege Pour Homme, which was unveiled in Q4, 2005 accounted for a smaller amount of the increase. In our opinion, it is the growing recognition and prestige of the brand which prompted sales of older Lanvin fragrances.

In addition to the geographic rollout of Arpege Pour Homme, we are very excited about the new women's fragrance hitting the market later this year.

In addition to a men's version of Burberry London, which I mentioned earlier, we are preparing for launch in 2006 a new men's fragrance for Paul Smith, Nickel, and S.T. Dupont.

Moving onto our special (indiscernible) business with Gap, Inc., we're moving forward and we are on schedule for a fall 2006 launch date for Banana and early 2007 launch date for the Gap brand. We are not in a position to discuss the products, design concepts, names, that we have in the works. All I can say is I am very, very pleased with our direction and progress.

As we announced earlier this week, our agreements with Gap, Inc. now includes personal care products for Gap outlet stores and Banana Republic factory stores in North America. For both Gap outlet and Banana Republic factory stores, we are assuming responsibility for manufacturing and managing the inventory of existing product lines, and we will be developing several new products and specialty items for both chains to supplement the current personal care offering. We will be establishing another [medicated] marketing and product development team for the initial and future programs for Gap outlet and Banana Republic factory stores. So new personal care products are scheduled to be in Gap outlooks and Banana Republic factory stores in time for 2006 holiday season. Additional new products are to be introduced throughout 2007.

In addition, as we mentioned last November, Inter Parfums took over responsibility for components sourcing and production of existing fragrance and existing personal care product lines for Banana Republic and Gap stores to our suppliers and contract fillers.

In the news release we issued yesterday, we have filled the 2006 guidance we initially issued on November 28. Namely assuming the dollar remains at current levels, we are targeting 2006 net sales of approximately $301 million and net income of approximately 16.9 million or $0.83 per diluted share. The earnings guidance for 2006 includes and after-tax charge of approximately $600,000 or $0.03 per diluted share to reflect the impact of SFAS 123, the new accounting rule requiring the expensing of stock option-based compensation.

At this time, Russ and I will welcome your questions.

(OPERATOR INSTRUCTIONS). Gary Giblen, Brean Murray Barrett.

Hello?

Gary, your line is open.

Thank you, sorry. I was just wondering about, on the gross margin side, that was very impressive performance, and Russ explained some of the elements there. But is it more -- what was the lower gift with purchase element? Is that a general trend in the industry, or was it just your ability to fine-tune your promotions?

No, it's not something that's going on with respect to the industry as a whole. I think it's kind of part and parcel as to the reorganization that we did and the price increases we did with our distributors at the beginning of the year.

It just so happened and it's really just a matter of there were not tremendous new product launches in 2005 that required expensive purchase with purchase and gift with purchase-type promotions. It's those types of promotions that are included with cost of goods as opposed to SG&A.

I think the trend, going into next year, considering the number of new product launches -- I would expect those type of promotions to clearly increase next year, but without any real major launches in 2005, those expenditures were down and that helped the improvement in the gross margin.

Okay, I can understand. Then, I mean, can we drill down and say what was the impetus for the good success of the traditional Arpege product? In other words, what did you do differently to accelerate sales there?

I would love to believe that we did a lot but honestly, we see a renewed interest in the label. We saw, when we acquired this license, we knew that the designer was getting some attention from the buyers. What started really as a reborn niche (indiscernible) is becoming more of a larger, established brand. Arpege had a very established customer; I will say it is an older customer, but [Ickland] Arpege, which is a new word for that, was about to bring a new customer to the counter. That's how we can I think explain the increase of sales.

Okay, thank you. Finally, are you seeing any of the impact of the department store consolidation that many other companies have noted? I realize it's relatively not a major part of your business mix, but -- or that element that is in the mix from Federated/May or other department stores, are they ordering more cautiously or more unpredictably and are the bargaining harder on price and things like that?

Yes. As we've mentioned in the past, we are a little bit less directly affected because we go through a third-party distributor to sell into those markets. I do want to say that we don't see any effect because you see a small effect. But clearly, the fact that we are not dealing with cosmetic counters and a tremendous amount of product in each of the individual stores, Inter Parfums is a little bit protected from the declines that we hear that are reported from some other companies that we compete with.

Okay. Gee, I thought it was your great products, but it's really the distributors absorbing some of the -- I'm just kidding. It's got to be both.

Thank you, Gary!

[Mimi Sokolowski], Equity Analysts.

Russ, can I get the cash flow numbers for the full year, please? Cash from operations and CapEx, annual?

Cash flow from operations is -- we haven't filed our reports yet, so I don't want to go out, all right, and just disclose a number. I can tell you it was a very positive cash flow, as you can probably tell just from looking at some of the balance sheet numbers that are out there. You will have those numbers available to you probably very early next week when we do file our statements.

CapEx is never really all that significant, but I can tell you that it's consistent with what it's been in the past, and the number is about somewhere around $2.5 million.

Okay. The other thing I wanted to ask -- I'm not sure if it's you Russ or Jean, or maybe a combination. Obviously there was a huge increase in the marketing expenditure in 2005. Where do you think you're going to go with it in 2006, given everything that you've got going on, as far as changing the business model around a bit, as well as a major new product launch?

Mimi, as we indicated when we first signed the new license agreement with Burberry, that the advertising requirements under the Burberry license were approximately double what they were under the old license. That new advertising minimum requirement, if you will, went into effect January 1, 2005, so we have the full effect for the full year. We are not surprised that the number is almost double what it was in the year before. On a go-forward basis, it's going to represent consistently that similar percentage of our sales because that's what's needed to drive the brand.

Okay, so I shouldn't look at it on a absolute dollar basis, but rather a percentage, the Burberry? (multiple speakers) -- Burberry but --?

Jean Madar For the whole year.

For the year as a whole, yes. They will have fluctuations on a quarterly basis because of when you sign your advertising, all right? But clearly, looking at it on a full-year basis as a percentage makes a lot of sense.

Okay. The other thing I wanted to ask -- Russ, did you say what Burberry sales were as a percentage of annual revenue?

We didn't, per say, but it's right around that 60%.

50 for total -- that includes mass?

60.

6-0?

Yes, right around that. I think it's somewhere around 59 or 60. I think we disclosed that in the sales press release that we issued at the end of January.

Okay, I will take another look at that. Is that going down or is it staying roughly the same, moving up?

As a percentage of sales?

Yes.

It moved down by about 1% or so, 1 to 2% from last year. As Lanvin has picked up, Burberry as a percentage of consolidated sales has declined slightly.

Okay, well, that's good news.

Rommel Dionisio, Wedbush Morgan.

Two quick questions -- first, as we look into 2006, obviously a number of major product introductions planned. Can you just discuss how you plan to spend some of these marketing dollars between advertising and promotion? Are you going to shift into one or the other, or is it just going to be relatively similar to your historical pattern? Then I have a follow-up.

If I may? Hi, Rommel, this is Jean Madar speaking. We do expect to change drastically the way we spend our dollars between advertising and promotion. We will follow absolutely almost the same path as last year.

Okay. One follow-up question -- Russ, the distribution agreements that you referred to possibly occurring in late '06 -- is any of that built into your '06 number?

No, no because, if anything, it's in-process. We are working on it. Until I know or until the Company knows exactly what form it's going to take, it would be silly to try to project that out.

Fair enough. That's what I thought. I just wanted to make sure. Thanks very much, guys. Nice quarter.

Do we have more questions, operator?

Yes, sir. Your next question comes from the line of Elizabeth Montgomery, Cowen & Company.

Hello, Elizabeth!

Congratulations on a really good quarter!

Thank you.

Thank you.

Elizabeth Montgomery (multiple speakers) questions and I apologize if missed it. Did you mention which markets you may bring distribution in-house?

Yes, we mentioned but you missed it, so we cannot speak again. (LAUGHTER)

We've indicated that the six markets that we've targeted are Germany, UK, Spain, Italy, Japan and the United States. The first two markets that we are looking to -- that we are closest in actually accomplishing it is in Germany and the UK.

Okay. Those are the two that you think this year?

Those are the two that we've targeted for 2006, correct.

Then, since you did beat the quarter and it seems as if the sales for the Burberry London fragrance are going pretty well, should we just assume that it's early enough in the year to raise guidance, or have you seen your cost or investments behind some of these new launches increase relative to your initial plan?

I really cannot talk. We just reaffirmed our guidance, so to talk about changing it is inappropriate.

Okay. All right, thanks, guys.

Thank you, Elizabeth.

(OPERATOR INSTRUCTIONS). Linda Bolton Weiser, Oppenheimer.

Good quarter, guys. I just had a couple of questions on Burberry for the year. Can you comment on -- I know, in the past, all the different sub-brands had usually grown in each year. Was that true in '05 of the Burberry subbrands?

It's true for the original Burberry, and it's true for Burberry Weekend. Burberry Touch did see some cannibalization during the year. We don't normally break out our numbers, so I don't want to go on the hook of saying that there was no cannibalization.

Also, the numbers for Brit were down slightly from the year before for the women.

Okay. I was just curious on what you've seen so far with the London launch. Is the level of cannibalization meeting your expectation? I know it's very early.

As you remember, we spoke about that. We have anticipated, in our sales, a certain level of cannibalization. It's not more or not less than (indiscernible) -- as we speak, we are not changing our position on that -- very certain cannibalization, and it's expected.

Okay, good. Then, just on the Gap Beauty, can you just review again for us your outlook for how the effect on earnings will be in '06? Is there any change on that overall?

For Gap Beauty, as you know, we are expediting and shipping some existing products to Banana Republic, Gap, (indiscernible) and factory stores. The big emphasis is on the launch of the new Banana Republic line, which will include a full line of fragrances, bath and beauty products, and home products. You know that we cannot go into more detail than that. If we go in the full distribution of all -- for all the Banana Republic stores, and we have -- we are very optimistic on this launch.

I think you said it would be a neutral effect on EPS. Is that correct?

What we've said, Linda, is that, with respect to the existing line and taking over the component sourcing and filling, we do not expect to generate any significant profits from that, as we are honoring the existing purchase commitments that existed prior to us taking over the product. So, we are generating some small sales at very minimal profits. All right? What we're really concentrating with respect -- we are hoping that some of that can help to absorb some of the expenses that we have with respect to the teams. All of it, including the launch of the Banana Republic line that's going to happen in the fall of 2006, is built into our 2006 guidance.

Okay. Just finally, I mean, I guess there was something about the closing one of the Nickel spas. Can you just comment on that brand and how it's doing and what your plans are for that?

Yes, I read also -- we read the same article (indiscernible) mentioning the women's (indiscernible), absolutely no intention of closing our New York spa, who had a great year, better than expectations in terms of sales and profitability because it's a spa that makes money. Our distribution of Nickel products in the U.S. is (indiscernible) and Nickel. Can we mention this (indiscernible) Nickel for the year, Russ?

Not yet.

Not yet. (multiple speakers) -- it will be in the 10-K, I guess? Yes, as soon as we release the 10-K in a couple of days, we will put the breakdown of sales.

The sales for Nickel -- I think that has been broken down. I don't have it in front of me, but in the sales release, I think there is a breakdown with respect to what Nickel (inaudible). The sales have been up. The Women's Wear Daily article referred to a spa in San Francisco. We do have a spa in San Francisco that's not owned by the company; it's a licensed spa. It's actually very small and generates very small revenue. At this point in time as of right now, there's no intention of closing that spa. I don't know where that information came from. But as Jean indicated, the spa in New York and the spa in Paris are doing fine, and we have no intentions of closing those in any way, shape or form.

Okay. Just one final thing -- I'm sorry to ask you to repeat it Ross, but can you give, again, royalty and A&P spending for '04 for the comparable period?

Yes. For the full year, royalty -- 27.1 million in 2005, which is up 30% from the 20.9 million in 2004. Promotion advertising was up 87% to 40.8 million in 2005, which compared to 21.8 million in 2004.

I would like to add something. The increasing royalty based on the new contract that we have with Burberry had an effective date -- (multiple speakers) -- of July 1, 2004. So we have more than anniversaried --.

Right, the increase in the royalties is not as severe as the increase in the advertising because of the fact that it had anniversaried itself as of June 30 of 2005. A very good point.

Right, and royalty expense is up because the sales are up, right?

That would has something to do with it, correct!

All right, if there is no more question -- what time is it? Okay, we can take maybe one more question if there is one.

Yes, sir. Your next question comes from the line of Douglas Pratt, Galleon Group.

Hello?

Hello. Just a follow-up question on your guidance, and I apologize; I've had some technical problems here, so I may have missed it. When do revenues start to come in from the Gap agreement?

You have a small amount of revenues from sales of existing product that will actually begin or is beginning now, as we speak, but the initial launch, for Banana Republic only, is going to take place in the fall of 2006.

Have you outlined what kind of revenue impact that will have in this year?

No, we did not break down revenues. Our guidance is on sales and earnings and EPS for the full year.

Including the launch of -- (multiple speakers).

Correct, which includes the information for -- (multiple speakers).

Then finally, on your guidance for revenues, does that assume a continuation of revenue decline for mass-market?

Mass-market, again, mass-market in 2005 only represented about 11% of sales. In our guidance, we think that the mass-market business, for the most part, has bottomed out. We're not expecting it to decline nearly to the extent that it has in 2004 and 2005 on a go-forward basis.

But it sounds like then you would expect there to be some decline.

Minimal, if anything. I would say flat to maybe a minimal decline.

Okay, great. Thanks very much.

All right, so -- is there one more question, or that's it for today?

Yes, sir. There is one final question; it's a follow-up question from Mimi Sokolowski, Equity Analysts.

Actually, you guys are free to go. I had a follow-up that was already answered.

Okay, so you have to have the last word, Mimi!

Think you, Mimi. We thank everybody for your participation on the conference call whether you're on the call live or listening via webcast. If you have any additional questions, as always, you can always reach me by phone. Thank you and have a nice day.

Have a good day.

Ladies and gentlemen, this concludes our conference for today. Thank you all for participating, and have a nice day. All parties may now disconnect.