Interparfums Inc (IPAR) 2007 Q1 法說會逐字稿

Good day, everyone, and welcome to the Inter Parfums First Quarter 2007 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, Chief Financial Officer and Executive Vice President. Please go ahead, Mr. Greenberg.

Thank you operator. Good morning and welcome to our 2007 first quarter 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 dependence upon Burberry for a significant portion of our sales, continuation and renewal of existing license agreements; sales and marketing efforts of Gap Inc. protection of our intellectual property rights, effectiveness of sales and marketing efforts and product acceptance by consumers; dependence upon third-party manufacturers and distributors, dependence upon management, competition, currency fluctuation and international tariff and trade barriers, government regulation and possible liability for improper comparative advertising or trade risks. 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 based operations, which are primarily conducted in France, represent sale of Prestige brand-name fragrances and our United States operation represent sale of specialty retail and Mass Market fragrance and fragrance related products.

Moving on to our first quarter financial results. As we reported, net sales rose 20% to $85.1 million from last year's $70.9 million. A compatible foreign currency exchange rates, net sales were up 15% for the period. European based operations achieved sales of $75.6 million, a 20% increase as compared to the $62.9 million in the same period last year. As Burberry achieved a 19% top-line growth and sales of Van Cleef & Arpels fragrances are included in our results for the first time.

Sales by our United States based operations rose by 19% to $9.5 million reflecting shipments to North American Banana Republic stores and continued sales of existing products to Banana Republic factory stores, Gap and Gap Outlet stores.

Gross margin was 61% as compared to 57% with the increase attributable to the commencement of operations in mid-February of our four newly established majority owned distribution subsidiaries. SG&A expense as a percentage of sales was 47% as compared to 44%. Royalty expense included in SG&A aggregated $9.6 million and $7.3 million for the first quarters of 2007 and 2006, respectively.

Promotion and advertising expense included in SG&A were approximately $12.5 million and $9.6 million for the first quarter of 2007 and 2006, respectively. The comparable quarterly increase in SG&A expense as a percentage of sales was also due to operating expenses relating to our newly established majority owned European distribution subsidiaries. Income from operations was $11.8 million up 28% compared to $9.2 million. Operating margins were 14% of net sales as compared to 13%. Net income increased 31% to $5.8 million from $4.4 million and diluted earnings per share rose 27% to $0.28 per share from $0.22 per diluted share in the prior year.

During the first quarter of 2007, we began operations at our four newly established majority owned distribution subsidiaries. Shipments to these subsidiaries are not recognized as sales until the merchandize is sold by the distribution subsidiary. For the first quarter of 2007, we estimate that sales were depressed by approximately $4 million to $6 million. Because our distribution subsidiaries were not fully operational until mid first quarter, and distributors generally build up inventory following the holiday season as well as in preparation for new product launches.

At March 31, 2007 working capital aggregated $167 million and our working capital ratio was in excess of 2.5 to 1. Cash and cash equivalents and short-term investments aggregated $79 million. Back when we announced 2006 results we pointed out that inventory levels are expected to grow in 2007, primarily as a result of the purchase of the Van Cleef & Arpels inventory on January 1st. The inventory requirements of our majority owned distribution subsidiaries in the UK, Spain, Italy and Germany and inventory requirements in connection with our Banana Republic and Gap agreements. We closed the first quarter with about 16% more inventory than at year end. As a result of the better than expected results for the first quarter, our new product launch schedule and changes in foreign currency exchange rates, we raised our 2007 guidance to net sales of approximately $375 million, net income of approximately $21.3 million and diluted earnings per share of approximately $1.03. Our guidance does not include any contribution from our new venture with New York & Co. and assumes that the dollar remains at current levels.

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

Thank you, Russ. I join Russ in thanking you for your participation on today's conference call. I hope that many of you have visited one of the 160 Gap Body stores that launched the new bath and body products that we created and produced for Gap. They are fabulous and I don't mind saying so. There are eight families bearing names like Raincheck, Moonwalk and Peacetrain and the packaging and presentation are very upscale. Within each group there is a hand lotion, a body lotion, shower gel and body scrub. You can also see the products at the Gap website. Roll out to additional Gap stores is scheduled for a late summer, with most stores adding the merchandize throughout the remainder of the year. We also have Eau de' Toilette line and the men's line coming to the market in the fourth quarter.

We now have in place another division and the resources to expand our presence in specialty detail. And as we [rebought] it in April we signed an exclusive agreement under which, we will design and manufacture a new line of bath and body products for New York and Co. retail location and their website. We anticipate that the initial line of bath and body products will be in the 600 stores in late 2007 or early 2008. New York and Co., one of the fastest growing retailers in the US, specializes in moderately priced, fashion oriented woman's apparel sold exclusively through their stores and online. New York and Co., has done an excellent job with this brand and loyal customer base around clothing and accessories that are trendy, affordable, comfortable and sexy.

As we reported, new Prestige fragrances for women are in the works for later this year under the Paul Smith and S.T. Dupont brand. Christian Lacroix [C'est La Fete] debuted in the first quarter and is now in the role out phase. And of course we are very excited about our first fragrance family under the Roxy brand, which is scheduled for a fall introduction in Europe and in the US.

Before taking your questions and I am sure you will have some, let me share with you some of our upcoming presentations. On June 6, we will be at the Piper Jaffray Consumer Conference at the [inaudible-highly accented language] in New York. Then we have been invited to address Oppenheimer Consumer and Retail Conference on September 10. And on September 26, we will be in London for Piper Jaffray again. Also our annual meeting of stockholders will take place on July 26 at 10:00 a.m. at our offices and I hope to see some of you at these events. Now I would like to open the floor for questions.

[OPERATOR INSTRUCTIONS]. Your first question will come from Erinn Murphy with Piper Jaffray.

Thank you guys and good morning. Congratulations on a fantastic quarter. I just had a couple of questions. First with respect to the Gap launch, it does look very good, very creative scent sampling, may I add; very, very good. I guess my question is with respect to marketing as well as advertising of this product, how does Gap plan to support that will it be similar to Banana Republic in terms of both national magazines as well as the very intense window signage or is there going to be another message for that, just for the consumer who is passing the store? Then I have some follow-up questions later on.

I am going to try to unsettle the swan, the launch of Gap. [inaudible--highly accented language] is quite different that the one that we have done in August-September of last year for Banana. When we launched Banana Republic in last year we launched all the stores at once. Here we are doing a slow rollout. We have got in first with 160 Gap Body's and we are going to go 200 Adults and another 200 Adult. So it's a progressive roll out. So as you can imagine we could not do the same type of launch which we have done with Banana Republic. So, Gap has spent an extraordinary amount of investment in the fixture in the store and in the space that is indicated to the plan. We will have windows from now till the end of the year and we will have some stronger sampling in the stores.

Great thank you that is very helpful and then I just kind of had a question with respect to gross margin. Obviously the improvement like you mentioned came from the change here to distributorship in Europe. Given that that happened mid quarter and also coupling that with the lower gross margin in your North American retail and that of your Prestige, how should we be looking at gross margin as kind of a the rest of the balance of the year. I guess we are originally working for us to be downed because of the pressure of the North American but may be if you could speak of that?

Yeah, well normally when the North American operations or when our US based operations are growing at a faster rate than the European operations we will a decline in margins because the margins are lower in our Mass Market product and in our specialty retail product. This particular quarter was very unusual from the stand point that in absolute dollars, European operations grew at 20% and United States operations grew at 19%. So clearly the margins that were generated from those two segments, if you will, stayed fairly consistent. So the benefit that we received, which is about 400 basis points was solely the result of the fact that of the sales relating through the distribution subsidiaries.

Okay, great thank you. And then just kind of back on the North American side, could you speak at least may be a little bit more directionally on the Mass side you know, you are saying your queue that -- it is continuing to decline and you speak to some other reasons why but may be is it similar to the case as we have seen in the past or has it slightly improved in terms of the year-on-year decline? Thank you.

I think the most I could say is, its fairly consistent with the decline that we have seen. Again its not an area that we are looking to divest ourselves of. It's not in total chaos or anything like that but I really do not disclose individual numbers for different pieces of the US operation. So I am not going to be able to quantify that but I can say that the decline is consistent with prior years.

Okay that is very helpful. And then last is just a question to Jean, with the New York & Co. launch in terms of just kind of how your thinking about price positioning and should we expect something similar to Gap or even may be at a slight discount to that product? Thank you.

Regarding -- it's a little bit early to discuss and to discuss the launch [inaudible-highly accented language] found that a long time ago and while doing a lot of analysis of what kind of product we should put in the stores. But I will say that from the positioning point of view we are going to position below -- well below the price point of the Gap.

Okay.

Something I would say more comparable to a -- we are going to try to hit below $10.00 of price points.

Okay.

This is all I can say for now.

Thank you that's very helpful and best of luck.

Thank you.

Thank you.

You next question, is from Rommel Dionisio with Wedbush Morgan Securities.

Yeah, good morning.

Well good morning, Rommel.

With regard -- though you have had the distribution joint ventures I realized its just been a few months but can you just talk about the overall business, how that's evolved, what you see, granted you account for it differently now but just has the business any sort of recent disruption or is it in the [technical difficulty]?

Rommel, as we have said in the past, we were creating these distribution joint ventures to get our finger into the pulse of the market in the individual countries that the subsidiaries are located. We also indicated that the whole concept behind setting them up and in partnering for the most part with our existing distributor was to make it as transparent as possible to the retailers and the retail market price so as to not upset the market price. Each one of these ventures if you will, are now set with aim to perform owning a majority of the shares of the distribution subsidiary and in all but one of the distribution joint venture agreement we are dealing with our existing distributors. As far as, any other financial information with respect to it, it's a little early to tell, all right but clearly as we can seen from the results from this quarter, the gross margin gets the benefit and we have the additional selling expenses relating to the operations of the subsidiaries.

That's good to hear, Russ. Thanks, and good luck on the rest of the quarter.

Thank you.

Your next question Mimi Noel with Sidoti & Co.

Hi Russ, hi Jean how are you.

Good morning.

Hello.

First I wanted to ask about the AMP expense in the first quarter given the absence of any major product launches in the March quarter is that something that we can expect to move up either on expense ratio perspective or the dollar basis. How should I think about that?

Russ?

You know on an absolute dollar basis when you compare it to 2006 you have to also think through the currency fluctuation effect so what is more important when you look at the SG&A is what it was as a percentage of sales. And in this particular quarter we were close to 15%, 14.7% of net sales compared to the first quarter of 2006, which was 13.5% of net sales. So we are slightly higher than last year but it is also slightly below what our annual run rate is and that makes sense because some of our promotions are geared towards our launch schedule and our launch schedule was heavily weighted towards the second half of the year.

Okay so just what I understand is you are going to be more than 12.5 million in the future quarter?

I would venture to say so, yes.

Okay and then the other thing. I don't know if you can comment on it at this point but don't quantify just characterize it. How are replenishment orders for the Banana Republic personal care line trending?

We are -- Banana Republic would be launched in September or as you know we had a strong Christmas and we are gearing up for a stronger back-to-school and Christmas. In September we will be launching a new fragrance for men and women in the Discover collection. And we are in general, we are on plan for Banana Republic.

So you are not necessarily going to be selling follow up orders of already sold products but introducing new ones to replace products that were already there?

Can you repeat? I am sorry.

I am just trying to understand the thing about replenishment orders versus initial selling? You know what is it?

We are replenishing. You know that we are on the VMI group [inaudible-highly accented language] Gap so, when they sell a piece on Monday we ship them on I am exaggerating but we ship them, we get stuff to replace what they are sold. So our sale we need a good representation of the sale goods. So we replenish of course the products that we sell every week plus that we are soon producing new fragrance as I said. While, we would be launching the men's and the women's fragrance in the Discover collection we have a full program, of gift sets for Christmas. One thing that is important is our hope -- you know that we have launched a series of candles, home products, are doing much better than projected. So we were originally in the 100 stores and we are going to be moving this line to more stores so this is important for us.

Okay that is all I have thank you.

Thank you, Mimi.

Thank you, Mimi.

[OPERATOR INSTRUCTIONS]. Your next question comes from Linda Bolton Weiser with Oppenheimer & Co.

Hello can you hear me.

Yes good morning, Linda.

Very good morning. Actually this is Joanna [Kaichuk] for Linda. I was just curious about the Burberry performance. I was wondering can you give us a rough idea of the underlying sales of Burberry not excluding the impact of JVs formation?

No we cannot just exclude or dissect it. What I can tell you is as we reported is that the overall Burberry sales we up 19%. We did indicate that the effect of the JVs was actually -- they depressed our sales for the quarter by somewhere between $4 million and $6 million and as you know Burberry does represent 60% of our overall business. Burberry had a very nice quarter and very strong on it.

It was a very good quarter for Burberry and likewise.

And we are expecting for that trend to continue throughout this year.

Okay. Great, thank you. That is very helpful. And then also given the infrastructure you have and the fact that you are launching products for the New York & Co. do you think you have the capacity to roll out additional products for other specialty or retailers in '08?

I would like to say that right now we are busy said that also last quarter and the quarter before. Banana Republic and Gap are very, very important names and we have teams of people working on these programs for the next 12 months. We found I think a great opportunity with New York & Co. to create this line of bath and body products. We will feel that we are on the icing that right now the company is in a good position.

Okay. Great, thank you. And then I have a question about the [inventories] of the sequential increase in inventories of about like 11 million what was the increase you should inclusion on Van Cleef. And then also, roughly they build up to the Gap?

I can tell you that the Van Cleef purchase was approximately 2.1 million Euro -- so its probably no actually dollars, $2.1 million was the Van Cleef. The detailed breakdown by other companies I don't have that readily available. It should like what we can discuss but I would not have that information readily available.

Okay. That is helpful. 2.1 million for the Van Cleef that is helpful. And then in terms of inventories what do you think the inventories would look like at year end well you know will inventories be up less than they are now?

No I think that inventories are going to continue to build as we are producing -- as we have a very aggressive launch schedule and we have a lot of new lines that are coming out. We have a tremendous amount of product development that is in the process for the launch of the Eau de' Toilette line and the men's line for Gap. I think that what we are going to see is a slow buildup especially as we go into the second and even the third quarter. By year end it should regulate itself. I would expect that the fourth quarter will probably be the lowest point of the year barring where it is right now.

Okay. Thank you very much for the latter.

There are no further questions. I will now turn the conference back to management.

Okay. Thank you. Again thank you for participating on this conference call, whether you are live on the call or listening via our Webcast. If any of you have additional questions as always I am available by phone. Have a 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.