Interparfums Inc (IPAR) 2006 Q1 法說會逐字稿

Good day everyone and welcome to Inter Parfums First Quarter 2006 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. I will now turn the conference call over to Mr. Russ Greenberg, Executive Vice President and CFO. Please go ahead Mr. Greenberg.

Thank you Brian. Good morning and welcome to our First Quarter 2006 Conference Call. If you have not received a copy of the press release we issued yesterday afternoon, please contact Linda Linda Latman of the Equity Group at 212-836-9609 and she will fax or email a copy to you. Before preceding further, I want to remind listeners that this conference call mat 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 on management, competition, currency fluctuation, and international tariff and trade barriers, and government regulations. In addition and with respect to our reported 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 SEC.

As you probably know, most of our current operations, in fact 89% of our first quarter 2006 net sales came from producing and distributing prestige fragrances and a small amount of prestige cosmetics and skin care products. The largest licensed brand in our portfolio is Burberry followed by Lanvin and Paul Smith. Our other licensed brands include S.T. DuPont, Christian LaCroix, Celine, Diane von Furstenberg, and as of March 2006, Quick Silver and Roxy. We also own a 67½% stake in the Nickel, a men’s skincare product line. The remainder of our sales is of mass market fragrances, cosmetics and personal care products. Our products are sold around the world in some 120 countries. Our 73% owned subsidiary, Inter Parfum SA, is also a publicly-traded company and 27% of its shares trade on the Euronext in Paris, which accounts for the most of the minority interest in our penal and balance sheet with the remainder attributable to the portion of Nickel not currently owned by Inter Parfums.

Moving on to today’s business, I would like to review the first quarter financial highlights. Net sales of $70.9 million were down slightly from $71.1 million; due to the strength of the US dollar in early 2006, at comparable foreign currency exchange rates, net sales were up 5% for the period. Gross margin was 57% for both periods. S, G & A expense as a percentage of sales was 44% for both periods and this was achieved despite approximately one million of additional Gap related S G &A expenses in connection with staff, product development, and start-up expenses. Income from operations was $9.2 million, up 2% from $9.0 million in last year’s first quarter. Operating margins were 13.0% of net sales as compared to 12.7%; and net income for both the current and prior year's first quarter was $4.4 million or $0.22 per diluted share. Of note, Lanvin sales across all brands were quite strong, which is a function of the strength of the brand rather than new product introductions. Also contributing to first quarter sales was the initial launch of Burberry London for women which was launch in February in the United States and much of Europe with a much broader geographic roll-out now under way.

Burberry represented 60% of our net sales, down from 62% in last year’s first quarter. The increased royalty in advertising expenditure requirements under our license with Burberry are now reflected in both the 2006 and 2005 periods. Company-wide royalty expense included in S G & A was $7.3 million in the current first quarter, down from $7.7 million in last year’s first quarter. And promotion and advertising expense included in S G &A was approximately $9.6 million in the 2006 first quarter, down from $11.1 million in the prior year period. Prestige products increased by one percent in actual dollars and approximately eight percent in constant dollars, as compared to last year’s first quarter. Mass market sales were down 11% which is a slower rate of decline that in the immediately preceding quarter but less of an improvement than we were expecting.

Our financial position remains strong. At March 31st, 2006, working capital aggregated $139 million and we had a working capital ratio of 2.7 to 1. Cash and cash equivalents in short term investments aggregated $65 million. At Match 31st, 2006, excluding currency effect, inventories had increased 19% from 2005 year end levels when our inventories were exceptionally low due to the timing of new product launches. The increase in inventories as of the close of the first quarter reflect our current needs pursuant to our new product launch schedule.

I will now turn this call over to Jean Madar, our Chairman and Chief Executive Officer. Jean?

Thank you, Russ. Good morning everyone and like Russ, I also want to thank you for your participation on our conference call. The major event of the first quarter was our new license agreement with Quick Sliver for the Quick Silver and Roxy brands. We devoted considerable time on our last conference call to this major corporate development. Let me say at this time we are now in the process of establishing a working group in Paris to focus on developing products for Quick Sliver and Roxy.

More than just fashion brands, Quick Silver and Roxy are names that imbue the active and outdoor oriented lifestyles. In the later part of 2007, we plan to introduce a Roxy fragrance for women. We have quite a few new prestige products launching in 2006. As we reported in yesterday’s news release, our largest new product launches are all scheduled for the second half of the year. This includes a new Lanvin fragrance for women, a new Burberry London for men, and a new Paul Smith fragrance for men. We also have men’s fragrances for ST DuPont and Nickel being unveiled in the spring and summer. We will have more to say about the new products in our second quarter report.

We are moving forward with the realignment of [inaudible] fragrance distribution and expect to establish a joint venture or company-owned distribution in four markets by year end or very early in 2007. The remaining markets where we envision a chance ion the distribution are still under evaluation. Moving on to the specialty retail, we are currently supplying Gap and Banana stores in the US and Canada with their existing product lines which had a nominal impact on sales to the plus side and a nominal impact on the gross margin to the downside. We announced last November that we took over responsibility for competence, [inaudible], and production of existing fragrance and personal care product lines for Banana Republic and Gap stores to our suppliers and contract fillers. And we are honoring pre-existing Gap purchase commitments.

The new Banana Republic personal care products that we are developing should be on store shelves in the fall, followed by our first new line for Gap stores in early 2007. We are not, again, in a position to discuss the product design concepts and names that we have in the works. All I can is that I am very pleased with our direction and progress. Gap will make a presentation to the press next week on their new Banana Republic line.

As you all know, our agreement with Gap Inc. now includes personal care products for Gap Outlet Stores and Banana Republic Factory Stores in North America. For both Gap outlets 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 special gift items for both chains to supplement the current personal care offering. We will be establishing another dedicated marketing and product development team for [inaudible] and future programs for Gap Outlet and Banana Republic Factory stores. The new personal care products are scheduled to be in Gap Outlet and BR Factory stores in time for the 2006 holiday season. Additional new products are planned to be introduced throughout the next year.

In the news release issued yesterday, we affirmed the 2006 guidance projecting net sales of approximately $301 million and net income of approximately $16.9 million or $0.83 per diluted shares. Our published guidance assumes the dollar remains at current levels and includes an after-ax charge of approximately $600,000 or three cents per diluted share to reflect the impact of SFAS 123 for stock-based compensation.

At this time, Russ and I welcome your questions. Operator?

At this time, if you would like to ask a question, press “*” then the number “1” on your telephone key pad. If you would like to withdraw your question, press “*” then “2”. Your questions will be taken in the order that they are received. Please stand by for your first question.

Your first question comes from the line of Wendy Nicholson with Citigroup Investment Research. Please state your question.

Hi, good morning. My question has to do with the promotion and advertising number in the quarter. It was down a little more than I expected and maybe that’s just the timing of new product activity, but I wondered if you could tell us what you expect that would be for the whole year and how we should see that ramp up as we go through the next few quarters?

Wendy, a quick elaboration on it because it is actually a very good question. I want to touch base on the fact that the effect of foreign currency exchange rates not only just affect sales but also affects your expense items as you move down and convert from Euro to US Dollars. In actual local currency, the exchange rate for the first quarter of 2005 was approximately, the average exchange rate was approximately 1.29. And for the first quarter of 2006, that exchange rate was about 1.20. So in the local currency, for advertising itself, the number is down a lot less than it appears. It’s actually approximately 8 million euros in the current quarter of versus 8.6 million in the prior quarter.

To get back to the second part of your question, which is what we would normally expect on a regular basis, in the SG&A line, we have typically been approximately between 14% and 16% of sales in any particular quarter. And I see no reason that the trend would not stay similar in future quarters.

Okay, that’s hugely helpful in terms of explaining on a local currency basis but if I wanted to play devil’s advocate for a minute, then I would say your other SG&A line which actually went up quite bit would have gone up even more if I had looked at it in local currency terms.

Well, not necessarily true. We did explain that approximately $1 million were an additional Gap start-up expenses that existed in this first quarter 2006 that did not exist in 2005. You have the same currency effect on royalties that you did on promotion and advertising.

Okay, fair enough. And your option expense would be in that other SG&A line too, right?

That’s absolutely correct and option expense for the current period was approximately $150,000.

Got it. Terrific. That you very much, Russ.

Okay.

Your next question comes from the line of Linda Bolton Weiser with Oppenheimer. Please state your question.

Thank. I was wondering if you could tell us how Burberry sales were in the quarter in local currency terms and also I’m trying to think about whether the Burberry sales will accelerate as you continue to roll out; the sales growth would accelerate. If you had to guess if the growth had to be bigger in second quarter or in fourth quarter with holiday, which would you guess would be the bigger growth quarter of Burberry?

We have not disclosed a break down of our sales by line. The only thing I can say in local currency is that all lines showed increases with the exception of Celine. So without quantifying it, I do not have a problem making a statement like that. With respect to anticipation, typically we will--, you usually do because of holiday season, see a higher third quarter. But because of the launch of Burberry London for, which is going to continue to roll out in the second quarter, I really don’t want to quantify it. I will be honest with you here. You have a couple different things affecting us and that is the continued roll-out for Burberry London for women which will continue in the second quarter. You have the Burberry London for men which is going to launch coming in the third quarter. And then you have your normal, although our business is not tremendously seasonal, you do have a little bit of seasonality as you move into the third quarter. Jean, did you--

Yes, I’m listening to your remarks if I may, but you know better than me. I will add on the top of that, the fact that the foreign exchange rate that has moved quite a bit during the quarter could mitigate the growth in any quarter like we had in the first quarter, it shows a flat or a little bit down but actually it is better than that. In our projections we say that assuming that the dollars, excuse me?

You’re correct but when I answered Linda’s question, I was really talking in local currency.

Okay. So in local currency, we will have a roll-out of Burberry London for women. It’s doing very well; all the indications are from stores are positive. We accelerate distribution in second and third quarters. But I would not like to be locked into more growth in second or fourth. I think we are comfortable with this $301 million position for the year.

Okay. I guess the root of my question is just that the local currency sales growth was five for the quarter and yet the year it’s projected to be ten. So that points to an acceleration of growth and yet your biggest launch was in the first quarter.

Part of the biggest launch was in the first quarter and when you initially launch a product, you’re launching in selective distribution. You’re not chain-wide in stores; you’re giving exclusive to certain stores in certain countries. You’re also not launching in all the countries of the world simultaneously, you’re launching in some of the major markets but you don’t have full distribution. So we are not seeing here in the first quarter the full extent of what the Burberry London women’s launch could be.

So there will be many more shipments in the second quarter?

We are expecting things to accelerate as the year continues. To pin point exactly when it’s going to happen and how it will compare to the launch of the men’s line, I don’t want to get into that kind of detail.

Okay. Can I shift gears a little bit then and ask about Lanvin? Can you comment whether the growth you’re seeing in Lanvin is in growth of stealth through retail or is it incremental distribution that you gained for the brand?

If I may, Russ?

Absolutely.

We have not changed our distribution of Lanvin. We have the same amount of doors as before, so it’s really an increase of [inaudible] which is--, I will say that we are happily surprised quarter after quarter of Lanvin. Sales are robust. The name recognition is stronger month after month. And we have very high expectations for the new Lanvin, a woman’s fragrance that we will be introducing this year.

That’s great. Just one final question; can you tell us the months that the Banana Republic product ships?

Russ, can we say that?

To pinpoint specifically, it will happen in the third quarter. I should happen in the third quarter.

Okay that’s helpful. Thanks a lot.

Thank you.

As a reminder, if you would like to ask a question, press “*” then “1” on your telephone key pad. Your next question comes from the line of Rommel Dionisio with Wedbush Morgan. Please go ahead.

Good morning. Just a question on gross margins. Usually when you have a mid-shift to prestige and, I know you have also negotiated better agreements with suppliers and you will see a gross margin improvement, but this gross margin was down by 30 basis points. Is there something unusual with [inaudible] purchase promotional activity or anything else driving gross margins down a little bit?

I think you’re dissecting the margin to a really great extent here. To talk about 30 basis?

Yeah, I know.

It is a little mind boggling. From our standpoint it could be a myriad. You’re talking about such a small amount that it could be a myriad of things. I don’t want to take a guess at what I think it might be. Clearly, purchase with purchase and gift with purchase type of promotions do go into the cost of sales line, so that can have an impact as with display and testers and other things that are also included in that line. But we were pleased to see it being maintained to the extent that it was, that for just a very small change I don’t think it’s--, I find it difficult to dissect it that high.

Fair enough. Thank you.

Thank you, Rommel.

Thank you, Rommel.

Your next question comes from the line of Mimi Sokolowski with Sidoti & Company.

Mimi Sokolowski: Hi Jean, hi Russ.

Good morning, Mimi.

Mimi Sokolowski: Two questions. First on the distribution; I think you were saying may at the last call with Roxy, you were saying you hoped to get two markets on by the end of `06 and now it sounds more like four. Can you tell me where you stand with transition and also how you feel about the economics if any are materialized yet or maybe it’s too soon to talk about that?

I did not hear very well, I am sorry.

Mimi Sokolowski: Just asking about how the distribution transition is coming in—

The joint venture and distribution subsidiaries.

Okay. Go ahead, Russ.

As Jean mentioned in his remarks, he did indicate that there are four markets that we expect to transition either at the very end of 2006 or very early in 2007. We had historically indicated two markets which was UK and Germany. We’re adding to that Italy and Spain. Those we believe can be transitioned by the end of the year. The exact details of the structure are still in progress. It is only May and we’re looking nine months ahead of us. So we are working on the exact details of the structure and as we get more information on that or as these distribution subsidiaries are actually formed and become part of our organization, we will certainly provide you will more and more information.

Mimi Sokolowski: I was just going to ask if it’s too soon to say whether or not there are any surprises so far. Either on the up or down.

Surprises in the what? The negotiations of this joint venture?

Mimi Sokolowski: Yeah. Maybe what I am driving at is--, really, how do I model for `07 once these distribution centers come on line or the joint ventures are underway?

Keep in mind the four markets, Jean, my guess is it probably represents somewhere around 15% of –

Okay, absolutely.

Somewhere right around 15%. From a modeling standpoint, although it can be material, it’s not severely material because 85% is not going to change. All right? And I think—

For 15% of the sales and for, let’s assume on the Burberry to start up, sales are going to double. That’s the way we have explained it to everybody the change in the distribution end and your question was is there any surprise? No, we have no surprise and are absolutely on line with what me, Phillipe and Russ expected.

Mimi Sokolowski: Okay, that’s very helpful. Thank you.

Thank you Mimi.

Mimi Sokolowski: Well I have just one more.

Go ahead.

Mimi Sokolowski: The advertising and promotion expense that you have for the balance of the year; can you say whether or not it will be weighted in any one quarter or two quarters versus one? Do you have an idea how it’s going to flow? Can you at least share that with us? And I would assume that it aligns with the product launches. Does it immediately follow, does it coincide with?

It pretty much coincides. One thing you have to keep in mind is that the requirements of advertising expenditures are under our Burberry contract which is probably the most significant, is tied to our distributor sales as opposed to our factory sales. So with that in mind, we would expect that the advertising expenditures are going to coincide with the actual timing of the retail sales, of the actual distributor sales to the retailers. Follow me?

Mimi Sokolowski: Yep, that’s good. That’s all I need. Thank you very much.

Okay.

Our next question comes from the line of Elizabeth Montgomery with Cowan. Please state your question.

Oh hi guys.

Good morning, Beth.

Russ or Jean, I had a quick question about the Quick Silver and the Roxy business. I know for the Gap venture you guys have developed a different team to work on the product and things like that, and I think I heard Jean mention that you might be doing something similar for Quick Silver and Roxy. Can you leverage the existing prestige business with that or are you going to need to really build up another team for those opportunities?

I will answer that. Maybe I did not make myself clear. We are not going to create a new team to handle Quick Silver and Roxy. Quick Silver and Roxy will be handled by a division that already exists in our organization, that’s the same division who is taking care of Lanvin and Paul Smith and it’s part of our prestige group of products. The agreement that we have with Quick Silver is very different than the one we have with Gap. Quick Silver is a real license. We use the name Quick Silver and we pay royalty to Quick Silver and the products will be sold to department stores, perfumeries, and so of course Quick Silver shops as opposed to Gap where the agreement is really more of a partnership or a joint venture where Inter Parfum produces and sells products to the Gap who then sells it to the consumer. Is that clear?

Okay thanks. That’s what I thought. I just wanted to check. And I apologize if you have already addressed this but I wondered if you had any additional color on the opportunity, maybe longer term, to expand into skincare with Burberry or any of your other brands?

Russ, do you want to answer?

We have always said in the past that a skincare line for Burberry is in our plans. WE have not put it on a calendar where we have actually announced any particular launch date. We have also indicated that we are going to be utilizing the R&D team from Nickel to assist in product formulation and development. We see a lot of synergies there and there is clearly an opportunity but we have not announced any particular start dates or any particular product. And the only thing I want to add to that is it may appear that we’re taking our time with respect to a skincare line under Burberry or even potentially maybe something with Paul Smith, and that is because it is a long process. Skincare is not like a fragrance. A fragrance is—, some people like the smell or don’t like the smell. Skincare, you’re making a claim that it does something and you really need spend the additional time in R&D to make sure that it does what you claim it to do.

Okay, makes sense. Thanks.

Okay, thank you.

Thank you. More questions?

There are no further questions at this time. I would like to turn the conference back to management.

Okay, thank you very much. Before closing, let me just mention quickly that I will be in Chicago on June 8th, representing Inter Parfum at Prudential Summer School Mini-Conference at the Intercontinental Hotel in Chicago. And finally, we thank you for your participation on the conference call today. Whether you’re on the call live or listening via web cast. If anyone has additional questions, as always, I am always available by phone. Thank you very much.

Thank you everybody.

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