Interparfums Inc (IPAR) 2006 Q4 法說會逐字稿

Good day, everyone, and welcome to the Inter Parfums fourth-quarter 2006 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'll now turn the conference over to Mr. Russ Greenberg. Please go ahead, Mr. Greenberg.

Thank you. Good morning and welcome to our 2006 fourth-quarter and year-end 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 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.

In addition and with respect to our reported agreement with Gap Inc., such factors include approvals of new products by Gap and sales and marketing efforts of Gap Inc. 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 many of you know, our European operations, which are conducted in France, primarily represent sales of prestige brand-name fragrances and our United States operations primarily represent sales of specialty retail and mass-market product.

Moving on to our financial results. As we reported, net sales were approximately $90.2 million or 37% ahead of the fourth quarter of 2005. At comparable foreign currency exchange rates net sales for the fourth quarter were up 34%. Sales by European operations were $70.4 million, up 22%, compared to $57.3 million. U.S. operations generated $19.8 million in sales, up 141% from $8.2 million.

With the big increase in sales by U.S. operations gross margin was 54% of net sales as compared to Q4 '05's 61%. Of course the change in mix had a very favorable impact on the SG&A as a percentage of sales which declined to 41% from 49% in last year's fourth quarter. There are no royalties nor advertising and promotional expenses associated with our specialty retail programs.

Keep in mind that this reduction in SG&A expenses as a percentage of sales was achieved despite $2 million in staff, product development and other startup expenses incurred in connection with our Gap Inc. agreement. Net income was $5.5 million or $0.27 per diluted share as compared to $3.9 million or $0.19 per diluted share in Q4 '05. This represents a 41% bottom-line improvement.

For the 2006 full year we reported record sales of $321.1 million, up 17% from $273.5 million. At comparable foreign currency exchange rates net sales for 2006 were up 16% from one year earlier. European product sales rose 23% and represented 84% of total sales while U.S. product sales were up 49% year-over-year. Net income rose 16% to a record $17.7 million from $15.3 million in 2005. Diluted earnings per share were $0.86 in 2006 as compared to $0.75 in 2005. In other words, 2007 was the best year in the history of our company.

At December 31, 2006 working capital aggregated $139 million and we had a working capital ratio in excess of two to one. Cash and cash equivalents and short-term investments aggregated $71 million. Also our Board of Directors authorized a 25% increase in the cash dividend from $0.16 per share to $0.20 per share per annum payable quarterly. The first quarterly cash dividend of $0.05 per share is to be paid on April 13, 2007 to shareholders of record on March 31, 2007.

Inventory levels at year-end of $69.5 million were actually slightly less than at the start of the fourth quarter. In 2007 we expect inventory levels to be higher in upcoming periods as a result of the purchase of the Van Cleef & Arpels' inventory which took place in January as well as the inventory requirements associated with the launch of four new prestige fragrances.

In addition, the establishment of majority owned fragrance distribution subsidiaries in the United Kingdom, Spain, Italy and Germany will place finished goods inventory on our books rather than unaffiliated third parties. Finally, there are also inventory requirements associated with our agreements with Banana Republic and Gap.

As we reported, we expect 2007 net sales, net income and diluted earnings per share of approximately $365 million, $20.4 million or $1.00 respectively. Now I will turn the call over to Jean Madar, our Chairman and CEO.

Thank you. I join Russ in thanking you for your participation on today's conference call. As we reported in February, sales by our U.S. operations surged in the fourth quarter by 141% to $19.8 million primarily due to the new Banana Republic programs we developed, produced and delivered to their North American stores. In April we'll begin shipping the new program we have created for Gap stores; the rollout will ensue during the balance of this year and in 2008.

Both Russ and I have been asked on several occasions about the impact of the management changes at Gap Inc. and Banana Republic. The simple answer is -- we do not believe there will be any impact. Our agreement, like all business agreements, is between two corporations, not individuals. Worth mentioning too is that with little exception the personal care product teams for Banana Republic and Gap have remained intact since we began working together.

Our European business showed strong growth as well with sales up 23% to $70.5 million for the fourth quarter and 13% to $270 million for the year. 2006 was a banner year for the largest brand in the portfolio, Burberry, with the launch and rollout of the fifth major line, Burberry London, which drove a 10% sales increase in local currency over 2005. If you exclude 2005 limited edition discontinued Burberry Brit Red, brand sales were up 20% in local currency.

We also saw very good growth by some of our older and established fragrance families. This is both extremely desirable and very atypical. In our industry the rule of thumb is that new products drive brand growth. Lanvin fragrances for example exceeded our internal target as brand sales increased 19% primarily due to strong gains by the [Eclad] Arpege line which came to the market in 2002. Lanvin brand -- the sales were also boosted by the successful fall launch of the Rumeur line.

Similarly, Paul Smith surpassed expectations with sales up 22% year-over-year which is all the more gratifying because much of the growth came from our first Paul Smith fragrance which debuted in 2000 and Paul Smith Extreme which came to market in 2002. The international launch of the men's Paul Smith Story also contributed to sales growth of the brand.

You should visit the fragrance foundation website; you will see that in 2006 more than 350 new fragrances and fragrance flankers were launched. The cost of developing, launching and promoting a new fragrance is very high and I've read that on average most fragrances don't have a lifespan beyond two years. So you can see where longevity translates into higher sales and retail investments. You may also be interested to know that the global fragrance industry, according to Data Monitor, grew 2.9% in 2006. Our 17% sales improvement clearly indicates that we are gaining market share.

Moving forward to our 2007 plans, in Europe new fragrances for women under Paul Smith, S.T. DuPont and Christian Lacroix brands are in the 2007 launch pipeline and we are very excited about our first fragrance family under the Roxy brand which is scheduled for a fall introduction.

At the start of the year we took over the Van Cleef & Arpels fragrance license and inventory. At that time we obtained the license the business was doing around $20 million ex factory. We think we can probably gross sales of the fragrance line which includes First, a strong seller even after being on the market for three decades. Work is starting on the new Van Cleef & Arpels fragrance launch for 2008.

Before taking your questions let me share with you some of our upcoming presentations that first myself will conduct. On March 28th we will be presenting at the (indiscernible) Emerging Growth Institutional Investor Conference at the New York Grand Hyatt. Then in early June we will be at the Piper Jaffray Consumer Conference at New York's St. Regis. Then we have been invited to address Oppenheimer's 4th Annual Consumer and Retail Conference on September 10th also in New York. We hope to see you soon (indiscernible). Operator, you can open the floor to questions.

(OPERATOR INSTRUCTIONS). Elizabeth Montgomery, Cowen.

Can you hear me?

I can hear you.

Congratulations on the good quarter. I guess I just have two questions. I was wondering if there's been any more expansion in the productline at Gap. Whether you have any more plans or whether you have at this point a firm plan to go into outlets with specific product or anything like that. And also whether the Gap products might include baby? And then Russ, I had a question on the '07 guidance. Can you just remind me, does that include anything for FX rates for '07?

This is Jean Madar speaking. I'm going to try to answer the first part of your question. Yes, there are more products coming for the Gap. As you know, we are launching around 70 SKUs, a line called Gap Body. Then we will have a full men's line. Then we'll have an Eau de Toilette women's line and then we're going to come back towards Christmas with another Eau de Toilette line. So we have a full schedule, almost every month we'll have something new in the stores.

This is for the Gap rollout of products. We are also designing products for Gap Outlet, even though Gap Outlet will carry also some of the products that Gap will have in their stores. And we have definitely plans to create products for Baby Gap and Gap Kids. This will happen I would say more towards 2008.

Okay, thank you.

The only thing I'll add to Jean's is that it's important to note that we have been selling to Gap Outlet the Gap's existing productline throughout 2006. And that will continue until we launch in the stores that the new Gap lines are launching in, the existing product will continue in that distribution.

Okay. But there might also be new product specifically for the outlets?

Absolutely. With respect to your question on FX, and this is actually an excellent question because today the dollar is very low, it's somewhere around 1.31, 1.32. When we did our initial guidance the dollar was around 1.29. We used a range between 1.27 and 1.28 when we did our initial guidance and because we don't know where the dollar is going to end up in the rest of the year, we kind of take it on an as it comes basis.

So a lot of -- I did notice some people talk about the dollar being where it is -- we can't estimate that it's going to stay there for the entire year. So I can only base it on where it was when we issued our guidance and it's so important to note too that for 2006 the average was around 1.26 for the year. So by using 1.28, 1.29 for our guidance, that's what we felt comfortable with going into 2007.

And can you just remind me how it changes your P&L when the dollar weakens?

If the dollar weakens then our European sales, which are based in euro, get converted to U.S. dollars at a better rate. So as the dollar goes down our sales go up. Does that answer your question, Elizabeth?

I think so, yes. But your costs also go up a little bit, right?

Everything gets translated, but your net margin in essence goes up.

Okay. But you do get the flowthrough from that?

Absolutely.

Okay, great. Thank you.

Gary Giblen, Brean Murray Carret.

Good morning and Jean, you had mentioned that your older fragrances and semi classic fragrances are doing very strongly. So would the logic of that also bring you to say that the -- do you think celebrity fragrances are -- I know you don't think that that's generally the best strategy, but do you specifically think that there's some shift in market share away from celebrity to quality designer fragrances?

I think it's a little too early to talk about shifting the trend, but last Christmas we saw our classic -- not only our classic fragrances, but other [industry] classic fragrances keep being and even gaining momentum versus the newer fragrances. Everybody knows that Inter Parfums has concentrated our energy into trademarks that are recognizable, the fashion brands are similar. We have not entered the celebrity fragrances.

But what I think is important -- one of the reasons that we've seen some fragrances that were introduced two or three years ago still growing is I think the right positioning of each of the fragrances that we have in the lines that we have. And we always work on trying to eliminate potential cannibalization between lines. I'm very happy to see our sales of Burberry growing. We will not introduce flankers in the future and this is I think a very good decision from the Company. We will be able to benefit from this strategy in the years to come.

Okay, I understand. And do you have other agreements that are under discussion with other large chains along the lines of a Gap or a Banana Republic?

We really -- at this point in time nothing has been announced with respect to any discussions that we've had with anybody. The last time the question was raised we basically answered that what we want to do is to make sure that our business model works and then we can explore the possibility of using this business model into other potential customers. But there's nothing that we're in any position to make any announcements with at this time.

Understood. Thank you and good quarter.

Thank you very much, Gary.

Linda Bolton Weiser, Oppenheimer.

Thanks. Hi, guys. I missed the very first part of the call. I think Russ; you were talking about royalty expense.

We can start again for you.

Hello?

I'm sorry.

Can you just explain why the Gap and Banana Republic products would not bear the royalty expense? I'm curious as to why the royalty expense ratio was higher in the fourth quarter of '06 than in the fourth quarter of '05.

If you remember, again this goes back more to the issues of 2005. In the past, and I've said this on previous conference calls, the calculation of the royalty was extremely complicated prior to us recently making some modifications to our agreement with Burberry. If you remember, the royalty computation was based on our distributor sales as opposed to our sales. When you're doing a computation based upon our distributor sales you can get all kinds of unusual fluctuations.

In connection with the modification of the Burberry license agreement that we did in September 2006, we modified the agreement so that now the Burberry royalty computation is actually based on our sales to the distributors or to the retailers. So for this year you are going to have a little bit of an unusual fluctuation and hopefully that will correct itself automatically in years to come.

Okay. I remember all of that discussion and explanation, but in third quarter the royalty rate was down year-over-year. So you're just saying there are abnormalities in the year-over-year change as we go through each quarter?

That's correct because in 2005 each quarter it was based on distributor sales, whereas in 2006 it was based on our own sales.

Okay, I see.

Fluctuations in distributors' inventory could have a significant impact on our royalty expense.

Okay. So then when does that become all apples and apples?

As we get into -- beginning in the third quarter of 2007 it will be apples and apples.

Third quarter '07?

Yes.

Okay, great. And then can I just ask you -- I mean you provided your EPS guidance for the year on January 23rd, so what elements of the cost side of it changed between January 23rd and now that made you go higher on the EPS line?

I'm sorry. With respect to exceeding our own guidance by the $0.02, is that what you're asking?

Yes, yes.

You know, at any year end you're going through details. An estimate is exactly that, it's strictly an estimate. It's based on a lot of projections and internal projections and internal expense estimates. When we're announcing earnings just a couple days before we're actually going to file our 10-K those estimates have been refined to the point where now we're reporting numbers that are real. There are still estimates involved but certainly they've been refined even in the two-month period that has transpired since January 23rd.

Okay. And then in terms of the Gap rollout, I guess we were under the impression that the Eau de Toilette would launch kind of along with the other products. Is there a reason why the Eau de Toilette is delayed into June rather than May 1st?

It's going to be between May 1st and June, I cannot be clearer on that. You have to understand that all of this rollout is based on fixtures being available to the stores. So we're talking about a lot of fixtures, we're talking about a lot of stores. This cannot happen overnight. So as fixtures roll out we will roll out more SKUs for the stores. But it will be definitely in the second quarter.

Okay, you'll be shipping it in the second quarter?

Yes.

Okay. And then finally, just on the inventory situation, it sounds like a couple of the things you mentioned are kind of like permanent changes in the inventory level like regarding the distributors. So --

To the extent of the distributors, that's the only issue -- that's something that's permanent, the rest of it is all a function of sales. But absolutely, with respect to distributors -- although I don't anticipate it being anything huge, it is a fundamental change. When we are going to be distributing direct to the retailers we are going to be carrying a little bit more inventory.

Okay. So I'm just trying to figure out what to expect for the year in terms of cash flow performance. Do you think operating and free cash flow will be --?

I think it's going to be very consistent to this year, maybe even a little bit better than this year. Keep in mind that last year was exceptional because our inventory levels at December 31, 2005 were very low, so the impact on that was a huge spike in our cash flow from operating activities in 2005. As we get into this year our inventories -- I think we believe that our inventory's at a very reasonable level. At this point it's at about 150 days. The increase in terms of cash flow is only 33% because there is a euro fluctuation that takes place as well when you convert the balance sheet. And considering that sales were up 37% in the fourth quarter alone our inventory levels are very reasonable at this point in time.

Okay. Thank you very much. I appreciate it.

Rommel Dionisio, Wedbush Morgan.

Good morning. With regards to the Gap launch could you share with us in the conversations you've had with them, what's level of advertising and signage and marketing support that you understand that they're going to be providing as the products get rolled out?

Absolutely, there is a program that has been put in place in terms of visuals, windows, in-store activities and I reviewed it recently with them and we think it's satisfactory to the launch of a Gap line. There is no specific commitment when it comes to advertising, but the important thing is I think the commitment of space. And I have to say that I was very positively impressed, not surprised but impressed by the effort that Gap has done to find space for the category.

I think that all the management at Gap is a big supporter of the category because they know what personal care can do not only for sales, but can do for the perception of a brand. And in May when you're going to go to the first Gap Body stores, the first 150 stores, you will be surprised by what they're going to give us in space.

Great. Thanks, Jean.

Neely Tamminga, Piper Jaffray.

Thank you, good morning. This is Erinn Murphy for Neely Tamminga and let me just add my congratulations on a solid finish to 2006. Jean, just first a quick question. In the past you've spoken to the Gap SKU launch could be a potential of 200 or 300 SKUs I believe. Is that still kind of what you're tracking for maybe '08 or just kind of when the line is fully rolled out with all the incremental productlines into all the stores?

Absolutely. At the end of 2007 when we'll have put together the full line of Gap Body, men's and the (indiscernible) of fragrances we will be maybe not at 200 but we're not far from this number. And 200 is a good target in terms of SKUs that we will have around 2008.

Okay, thank you very much. Then Jean, just another question. With respect to the Burberry, obviously you've seen very nice growth there with the launch of Burberry London. How are you planning that business for 2007 given that you're not looking for any incremental new launches with that line? But is there still opportunity to grow sales just based on incremental distribution whether that be new doors, new countries or how are you actually planning that business for '07?

We are looking not at an increase in the amount of doors, but we think that Burberry London will do as good as it did during last year, during the launch. We think that with the promotions that we have in place for the line we could increase the business on Burberry London. We have a lot of gift sets and a lot of GWPs and to any major line. So I'm very comfortable with our projections for Burberry.

Thank you, that helps. And then Russ, just a couple follow-ups, maybe more housekeeping questions for you. Obviously gross margin down year-on-year in the quarter and your explanation made sense in terms of the mix shift into the specialty retail channel. Was there anything else impacting that gross margin in the quarter? It just seemed a little bit lighter than what we had been looking for?

No, primarily it is the product mix of U.S. versus European. And we've always indicated that the European operations can generate a margin of 60% plus as the Gap line is somewhere around a 50% margin. I did take a look also -- usually in a year when we launch a new Burberry line we do have a little bit more of POP or gift with purchase type of promotions. But coming out with the numbers it was just slightly ahead in 2006 versus 2005. So I'm attributing most of the decline in the margin to the product mix.

Okay, great. Thank you very much. And then just a last question for you, Russ. Just tax rate seemed a little higher in the fourth quarter. How should we be planning that just going forward for '07?

Fourth quarter is a little unusual. I can tell you that there really have been no changes in tax rates in the United States or in France. The slightly higher than normal tax rate in the fourth quarter is a result of evaluating our valuation reserves on deferred tax assets. And it's really more of a onetime issue than anything that's of any permanence. That will be more explained in our 10-K with respect to the numbers and things of that sort.

Okay. Thank you both very much and best of luck this year.

(OPERATOR INSTRUCTIONS). Jonathan [Jakomec], KCO Investments.

I have one question concerning the balance sheet. Why were actual expenses so much at the end of 2006?

Good question. Approximately $23 million in accrued expenses relates to the acquisition liability for Van Cleef & Arpels. That acquisition took place in January, but we were committed to it as of the end of the year. So it does include approximately $23.5 million relating to the license acquisition.

Okay. Thank you.

There are no further questions at this time. I'll now turn the conference back to management.

Thank you again and thank you for your participation on this conference call whether you are live on the call or listening via our webcast. If you have any additional questions, as always I'm available by phone. Have a very nice 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.