Interparfums Inc (IPAR) 2007 Q2 法說會逐字稿

Good day, everyone and welcome to the Inter Parfums, Inc. Q2 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 will now turn the conference over to Russ Greenberg. Please, go ahead, Mr. Greenberg.

Thank you. Good morning and welcome to our 2007 Second 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. These factors include, but are not limited to, the risks and uncertainties discussed under the headings, "Forward-Looking Statements and Risk Factors" in Inter Parfums' annual report on Form 10-K for the fiscal year ended December 31, 2006 and the reports Inter Parfums filed from time to time with the Securities and Exchange Commission.

Inter Parfums does not intend to and undertakes no duty to update the information discussed. For those of you who are new to Inter Parfums, we refer to our European-based operations. We are primarily talking about sales of prestige brand name fragrances, which are conducted in France. When we discuss our United States operations, we are referring to sales of specialty retail and mass market products.

Moving on to our second quarter financial results, as we reported, net sales rose to a record 82.8 million, up 18% from 70.3 million in the same period last year. At comparable foreign currency exchange rates, second quarter net sales were 13% ahead of last year's second quarter. European-based operations achieved sales of 70.5 million, up 16% from 60.8 million in last year's second quarter. The continued strength of Burberry fragrance sales was further enhanced by the introduction of Burberry summer fragrance. We were also very gratified by Lanvin brand sales. In particular, Éclat D'Arpege, which continues to outperform expectations.

The inclusion of Van Cleef & Arpels since the start of the year also contributed to our top line growth. Furthermore, since mid first quarter, we've began generating sales by our four majority-owned European distribution subsidiaries.

Sales by our United States-based operations rose 29% to 12.3 million, compared to 9.5 million in the same period one year earlier, primarily reflecting new product shipments to 160 North American Gap Body stores. Continuing sales to Banana Republic and ongoing sales of existing products to Banana Republic Factory stores and Gap Outlet stores.

Gross margin was 58%, as compared to 56%. The increase is the result of the operations of our four majority-owned distribution subsidiaries. Selling, general and administrative expense as a percentage of sales was 50%, compared to 47%. Promotion and advertising included in SG&A aggregated 13.2 million for the current second quarter, as compared to 12.3 million for the corresponding period of the prior year.

Royalty expense included in SG&A expenses rose 41% to 7.9 million in the current second quarter, compared to last year's 5.6 million. The balance of the increase in SG&A as a percentage of sales is primarily due to operating expenses related to the four majority-owned European distribution subsidiaries and ongoing product development expenses for our specialty retail products.

Income from operations was 6.8 million, up 7%, compared to 6.3 million. Operating margins were 8.2% of net sales, as compared to 9%. Net income increased 17% to 3.7 million from 3.2 million and diluted earnings per share were $0.18, up nearly 13% from $0.16 per diluted share.

In the past, we have stated that our sales are not subject to material seasonal fluctuations. That is changing somewhat. And going forward, seasonality will be a more meaningful factor than it had been in the past. For the most part, shipments by our majority-owned distribution subsidiaries to their retail customers are more concentrated in the second half of the year.

Similarly, our delivery schedules for our U.S. specialty retail customers place a strong emphasis on holiday season sales. That means that, in general, you can expect more sales and profits falling into the second half to the year than in the first.

On a somewhat related point, back when we announced 2006 results, we pointed out that inventory levels will be higher in 2007 than at prior periods. That is certainly the case. We closed the second quarter with over 40% more inventory than at year-end. As we mentioned on the last call, there was the purchase of Van Cleef & Arpels inventory on January 1, plus, we have the inventory requirements associated with the launch of new prestige fragrances. There is a substantial inventory requirement inherent to the majority-owned fragrance distribution subsidiaries and we have growing inventory requirements, in connection with our Banana Republic and Gap agreements.

As we reported, we purchased the remaining 32.5% interest in Nickel that was not already owned by us and acquired the Lanvin trademarks and brands for fragrance and related products. The Lanvin acquisition, in particular, was a very strategic move for Inter Parfums. As the owner of this collection of trademarks, rather than a license, we have increased the substance and stability of our brand portfolio while simultaneously increasing our control and flexibility in building this brand. If we succeed in building the fragrance brand, and expanding into related products, we will have a truly valuable asset, which, in 18 years, may be monetized should Lanvin decide to repurchase the trademarks.

Before passing the call over to Jean, I just wanted to mention that our strong financial position makes transactions like these possible. At midyear, working capital aggregated 165 million and we had a working capital ratio of 2.4:1. Cash and cash equivalents and short-term investments aggregated 63 million.

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. At the time of our last conference call, the first collection of bath and body products for 160 Gap Body stores were making their debut. We are very pleased with the initial consumer response and sell-through. These products are being placed in 200 more Gap adult stores this month, followed by 300 more in October. Also, six eau de toilettes are debuting at Gap Body stores with distribution to Gap adult stores continuing as the year progresses, for a total of about 600 or so locations.

Also, this month, three new men's fragrances make their debut in about 200 Gap adult stores. The fragrances come in a cologne spray, deodorant, body spray and an aftershave. There is also a grooming and skincare collection comprised of shave gel, face wash, power scrub, moisturizers with SPF and AM Rush Wake-Up Tonic. The schedule calls for 300 more Gap adult stores to stock the men's fragrance and grooming lines in October.

As we reported, the Discover collection for Banana Republic is being [enlarged] by two members, two new members, Malachite for women and Cordovan for men. There are also new ancillaries such as shower gel being added. Thanks to Banana Republic, we are now in the home fragrance category, a business that we really like and will be growing with additional scented candles for the Banana Republic stores.

We have been asked recently about Gap's new CEO, Glenn Murphy. While we haven't met as yet, I cannot help but be impressed by what he accomplished at Shoppers Drug Mart and I'm equally encouraged when I read that the beauty category played an important part of his turnaround strategy. Before ending our discussion of specialty retail, as reported, we expect to have product in the New York & Company stores around the holiday season.

Moving on to our European operations, we have a strong new product line-up for the second half, including Paul Smith Rose and S.T. Dupont Blanc. This month, we begin the launch of our first Roxy woman's fragrance. We are focusing marketing efforts on Roxy's key market, the U.S., of course, France, Spain, the UK and Australia. The fragrance launches this month in the U.S., Roxy's number-one market, while distribution in the UK and the rest of the world will take place in September.

Here, in the U.S., the new Roxy scent will be sold in 1,200 doors, including Macy's, Dillard's and Sephora. Roxy is aimed at young women ages 15-20 and according to published market research, 90% of all teen girls know and recognize the Roxy brand. As you may have recently read, Roxy is being tested as a standalone retail concept. In the U.S., [we're opening] four Roxy stores, which is supposed to double by year-end. Also, in Europe, there are plans to open 60 Roxy doors in the next two years. I will say our timing for these launches couldn't be better.

As we disclosed yesterday, the first Burberry fragrance family will be unveiled in early 2008. Also, look for a new woman's Van Cleef & Arpels scent, two more Roxy women's fragrances and a Quiksilver sun care line. So 2008 will be a busy year for launches.

Taking a cue from some of our peers who have done an amazing job bridging new life and sales into classic fragrances, in 2008, we are also planning re-launches of Van Cleef & Arpels [first] and Burberry Week End.

Finally, we are pleased to report that, assuming the dollar remains at current levels, we have, again, raised our 2007 guidance. We are looking for 2007 net sales/net income and diluted earnings per share to come in at approximately 378 million for sales, 21.5 million for net income and $1.04 for EPS.

Before taking your questions, let me share with you some of our upcoming presentations. We have been invited to address Oppenheimer Fourth Annual Consumer and Retail Conference on September 10 in New York. And on September 26, to speak at the Piper Jaffray Conference in London. In December, we'll be presenting at the Wedbush Morgan California Dreaming Conference, which runs from December 11 to the 12th. We hope to see some of you visit us.

So operator, you can open the floor for questions. Operator?

(OPERATOR INSTRUCTIONS) Please, stand by for your first question. Our first question is from Linda Bolton Weiser with Oppenheimer.

Actually, this is Joanna Kaichuk for Linda. I have a couple of questions. First, can you please talk a little bit more about the Gap sell-through? How is it in line above or below your interim expectations? And also, you know, how is this relative to Gap's expectations?

The Gap sell-through on [every single] store?

Yes.

Well, I guess, Russ, I'm going to answer this question.

Sure, thanks.

As you know, we have launched the first line in the adult stores. The sell-through has been very good. It has been above projections, above Gap's projections, and above our projections but as you know, this is a slow rollout and with 150 [body] stores, really not the best stores for the Gap. So we anxiously awaiting to hear the sales in all the adult stores. But as we speak, we have some sales above our expectations.

Okay, thank you. And then secondly, on the gross margin, we understand that the gross margin this quarter was not up as much as the first quarter because of the Gap inclusion but we were wondering about second half gross margin. Given that the Gap business will be even bigger, do you expect the gross margin will be up or down, year over year, in the second half?

I would venture to say that the gross margin is going to continue to be above comparative prior years. The major component that is causing the gross margin to be higher is the European distribution subsidiaries in the UK, Germany, Italy and Spain. And as we mentioned during my portion of the initial remarks, the second half of the year is where you really concentrate a lot of your distribution subsidiary sales.

So clearly, as a result of that, I think that the margins will increase. It will be mitigated a little bit because we've also mentioned in the past that the specialty retail business generates approximately a 50% gross margin, as compared to the approximate +60%, which is generated our prestige fragrance.

Okay, great. That's very helpful. And then also, on the Lanvin acquisition, can you just -- a couple of the numbers. Is it a correction question about 2-to-3-million [free tax of] royalty expense will be eliminated? Also, is that [unintelligible] 5 million of annual amortization expense will be also done, right? And then even that -- as those two combined will more than offset the increment or interest expense. So, I guess assuming all that, we're getting that this deal could be roughly five to ten accretive annually. Are we roughly in the ballpark range for that?

Well, I'm not going to concentrate on specific -- I'm not going to discuss specific numbers that we haven't disclosed. I can confirm to you that the amortization that existed on the initial license agreement, when we first entered into the license agreement back in 2004. We will no longer have amortization on that. And I can confirm that the royalty disappears. There is a servicing and development fee that we have agreed to continue to pay Lanvin. We have not disclosed originally what the original royalty was and we will not disclose what this other fee is. But certainly, one can expect that the development fee is significantly less than the royalty. And then yes, of course, you do have the impact, with respect to the interest income that would not be generated or the interest expense that will be generated on debt to support the acquisition.

The other thing just to keep in mind that when you convert anything that happens from our European subsidiaries, you have the conversion to the dollar, you have the tax effect and then you have the minority interest effect. So if you do your calculations correct, you're going to come up with an umber but I will not comment today on exactly what that number is. We think there is a small -- we definitely know that it is not a dilutive transaction. It's certainly [relative] but the exact amount, we're not prepared to discuss.

And it will be only for six months because we've done this -- it will be for the last six months of this year.

That's correct.

Yes, thank you. And then, I guess, looking forward into 2008, more specificity on the timing of the Burberry launch. You mentioned that it's early in 2008 but is it early first quarter or later or is it more like towards the second quarter of '08?

Go ahead, Russ.

The plan at the present time is to launch during the first quarter of 2008.

I want to take this opportunity to talk a little bit about the Lanvin trademark acquisition because of course, it's not a dilutive. It's accretive, in terms of earnings but from a strategy point of view, I think it was a very interesting thing to acquire a brand like Lanvin. So we are not the licensee anymore. We own the trademark. We don't need the approval to come up with products, the design. It's a departure -- it's a good departure and it's -- as we see that Lanvin has tremendous potential. Again, the sales have been growing at a very fast pace over the last two-and-a-half years, we've seen that now that we own the trademark, we can spend our money differentially and generate even more sales and more profitable.

So it's the first time that Inter Parfums will own a trademark in the fragrance. We own the Nickel in skincare and if we see more opportunities like that, we'll definitely jump on it.

Okay and may I ask one more question? It's the same about Quiksilver, you know, do you expect to launch the Quiksilver sun care line early 2008? Is it like first or second quarter? Similar question for Burberry and then secondly, the distribution, the Quiksilver sun care doesn't match the Roxy fragrance?

The distribution of Quiksilver will be limited, as opposed to the Roxy fragrance and the launch -- I don't have my paper in front of me but I think it's around second quarter -- Russ?

Yeah, it's a sun care line as well, so it is geared from somewhere in the mid of 2008.

Okay and when you said the distribution will be limited, you mean that it will be only in Quiksilver stores?

No, it will be in Quiksilver stores and in certain department stores but this is a sun care line, so we will -- will not be sold in the same departments and the fragrance line. You cannot compare the business generated by the Roxy fragrance line with Quiksilver sun care. But don't forget that after Quiksilver sun care, we will be launching the Quiksilver fragrance.

And when is it [signed] for?

The year after.

You mean in 2008 as well?

No, no, 2009.

Oh, okay, I see. Okay, great. That's all for me. Thank you very much.

Thank you.

Your next question is from Elizabeth Montgomery with Cowen.

Hi, guys.

Welcome back.

Thank you. Lots of catching up to do. I think I still have a couple questions but I guess first, just for people who are maybe a little bit cynical about the Lanvin acquisition. I guess I'm trying to understand from their perspective, they still have the rights for the apparel and the jewelry.

That's correct.

Yes.

Do you have an understanding of why they would be willing to sell the rights to the fragrance to you guys?

The company is growing at a very fast pace. Their sales are -- they very much pride themselves by [doing] the last three years -- I'm talking about the clothing business. So we had a window of opportunity where they really wanted to raise some money and Philippe and myself, we convinced them that it was also beneficial for them to raise cash and sell us the trademark.

As Russ said, there is still -- because they are going to do all of the fashion shows and all the PR with a small amount of fees to them, nothing to compare with the royalty. So they accepted -- it's not the first time that -- it's unusual but it's not the first time a clothing company has sold it's trademark. So we had the opportunity and we took it.

Okay, well, that's helpful. I guess, in terms of the Quiksilver sun care line to now having -- owning the rights to the Lanvin brand, does it make you -- and there's still the Burberry skincare opportunity -- does it make you guys more excited maybe or do you want to move up the timeline for kind of get into some of those other categories that you've been talking about that you haven't really done yet?

Just to -- skincare, as Jean mentioned, the distribution for the Quiksilver line is, at the onset, is going to be limited distribution. Skincare is sold very differently than a fragrance and you really have to start off very slowly. We've always indicated that in our pipeline of products that we are looking to launch, we are looking at the potential for Burberry skincare or Burberry cosmetics of some sort. And that is in our plans, although we have not specifically fixed a specific launch date.

These are very, very difficult types of products to launch and you have to be very, very careful. So yes, it is still in back of our mind and yes, with respect to now, the acquisition of the Lanvin trademarks, we have the rights, which [are called in] Class 3, which include cosmetics. So we clearly have the opportunity there to do it. Exactly what the timetable will be, we really want to take some baby steps with respect to this because skincare is a very, very problematic industry.

Elizabeth Montgomery; Okay, that makes sense. So you look at the Nickel and then the Quiksilver thing and you--?

Absolutely.

Yes, absolutely.

Okay and then my last one -- sorry to be nitpicky about this but I seem to remember when you guys were talking about bringing the distributors in-house, that we were to think of it as maybe adding 15 million in revenue but not really adding much, in terms of margin. And I couldn't really tell from your comments, Russ, if -- I know it helped the gross margin but it seems like SG&A went up, too. Are we still thinking that it's not really accretive or that it's just neutral and that the real benefit is just to get closer to the consumer?

Well, at the present time, because of the seasonality of the business, with respect to the direct distribution, you clearly have seasonality in sales and earnings. I can tell you that, for the first six months, it's been very, very close. It certainly has not been tremendously accretive, all right? In some countries, it's actually has been a little bit dilutive. The other fact, too, is that, especially, at the end of the first quarter, when we even indicated that our sales to the distribution subsidiaries exceeded the sales that the distribution subsidiaries had for their retailers. So that, clearly, had some impact. A lot of that was made up in the second quarter, so for the six months, it's probably very close. But that's really the reason for my comments with respect to the seasonality of the business because we are expecting to see a significant jump in sales in the second half of the year and then we do believe that the operations of the distribution subsidiaries will be profitable and I stand by the comments we made a couple years ago, that it won't be as profitable as the -- from a net margin standpoint as to what we normally make because there are tremendous servicing fees that we need to pay in order to operate these subsidiaries.

Okay. All right, thanks, guys, that's helpful and congratulations.

Thank you, Elizabeth.

Thank you, Elizabeth.

Your next question is from Neely Tamminga with Piper Jaffray.

Great, thank you. This is actually Erinn Murphy for Neely. Hey, just had a quick question on the guidance outlook, the raised guidance. Is that entirely the New York & Company shipments or is there a modest impact from the Lanvin agreement. And then secondly, with respect to the New York & Company launch [through this holiday], are you assuming to be in all doors or will this be more of a staged rollout? And then also, what kind of products are you looking at for that launch? And then I have one follow-up. Thank you.

Russ, would you like to start?

I'll start and then you'll finish, okay? With respect to the guidance and what not, yes, we clearly indicated in the press release that it takes into account New York & Co., as well as Lanvin. Just to touch a little bit on New York & Co., when we first signed the agreement, which was in April, we indicated that we weren't sure if we were going to get product out in 2007 or 2008. We've also always indicated that it takes close to -- anywhere between 12 to 18 months to actually have a product line available and ready for launch.

The fact that we are now looking to launch this product for holiday season of 2007 means that we've concentrated almost 12 to 18 months' worth of development and concept creation and the expenses that go along with that, into a six-month period. And as I've always said, with respect to the research and development expenses, in connection with any launch that we have, those expenses must be expensed. They cannot be capitalized. The accounting literature is very clear that you must expense it as incurred. So that is also built into the increase in the revenue guidance.

With respect to the product line, Jean, you want to go on with that?

Our plan is to launch all the stores towards the fourth quarter, so it's not rollout. I mean, we are rolling out all the stores at once. And the line, we're going to start with bath and body line with shower gel, body lotion, body mist, creams and things like that. Price points will be accretive and we will play with multiple purchases. We'll give some incentive for people -- I mean, New York & Company will give incentive, from the price point of view, to induce people to buy more than one piece. Strong promotion will start at launch, in-store visuals, some coupons and some, also, gift with purchase but I cannot tell you more than that. It's more of a program New York & Company is putting together.

On our side, like Russ said, to do, in six months, the work of 12 was challenging. We are not far. We are still -- we are fixing a couple of little issues but our silver line is very -- it's a very coherent line. It fits very well with the image of New York & Company. It has some fashion appeal at an affordable price. So after that, we are already working on programs for 2008 with more body products and color cosmetics.

Great, thank you. That's very, very helpful. Just a quick follow-up on that then. So the New York & Company promotions or the couponing or the gift with purchase, that would all be then on New York & Company's books and that would impact their PNL versus yours since you'll receive the revenue at ship end?

Yeah, the deal that we have with NYC is fitting well to the deal that we have with other retailers such as GAP or BR. They are responsible -- they are financially responsible of all the activity in their stores. Sampling, couponing, visuals, windows, advertising. We are responsible for all the package development, the product development, all the different malls and the hours that we have to do to make the line.

Okay, great, thank you. And then just really quickly on Banana Republic. It's exciting to see some new fragrance and home fragrance plan for the back half but what are your intentions for the body care line? I think it slightly under performed at least some of your initial expectations.

Thank you for the question. It's a very good question. The fragrances are performing very well. The men's are much, much higher than our expectations. The women's are also doing well. The home fragrance was really a surprise of the year. Apparently, a lot of people look at Banana Republic for candles, potpourri, [shower gels] and things like that. But our bath and body line was, I would say, a little bit too complicated. The navigation was quite difficult to understand between the different products and the different flavors. So we are simplifying and less than 30 days, we'll have a whole new line of shower gels and lotions in all their stores.

Great, thank you very much and best of luck, gentlemen in the fall.

Thanks, Erinn.

(OPERATOR INSTRUCTIONS) Our next question is from Mimi Noel with Sidotti & Company.

Hi, Jean. Hi, Russ.

Hello, Mimi.

Good morning.

A couple of simple questions.

Thank you.

Russ, I'll start with you. The costs associated with the distribution subsidiaries, how can I think of that? Is that more fixed or variable?

For the most part, it's variable.

Okay.

All right? There are very little fixed expenses today with those distribution subsidiaries. That will change as time goes on and as we do more of the requirements of running the business for those distribution subsidiaries, as time goes on.

Okay.

But today, if you remember, we partnered in a joint venture with our existing distributor?

Right.

So we are basically renting their sales force and renting space from them for the storage of the product and all of that is done on a sales-based fee at the present time.

Okay, that's what I was missing. And another question somewhat related. The royalty expense -- and maybe I'm looking at it inappropriately -- but the royalty expense expressed as a percentage of prestige or European sales was actually higher than it was last year. Whereas, I was under the impression that the royalty was based on the factory price and not the wholesale price.

Well, what you have is you have kind of non-comparability in the current period. If you remember, back in September of last year, we modified the agreement with respect to Burberry, in connection with the calculation of the royalties. So what you have in this quarter is you have one period being calculated one way and another period, the current period, being calculated another. So it makes it very, very difficult.

Okay, so it's an anniversary factor that doesn't get in until--?

Yes, going on into the future, it will be much more comparable and much easier to make those kind of comparisons.

So my initial understanding was correct? It was just a quarter early?

That's correct.

Okay. And then one last easy question. The tax rate was a little bit lower than I thought. Physically, you assumed a 36%. Should I -- do you need to stick with that?

The reason for the decline in the tax rate is, believe it or not, is the result of our distribution subsidiaries. Tax rate in the countries that they're operating are lower than the tax rate in France.

Okay.

I don't want to go all out and say it's going to exactly continue. There was a little bit of a concentration in the current six months because of the elimination of the inventory. It's very complicated. I mean, I can go from a theory in a little bit more into it.

I think -- I don't want to get it too complicated.

Okay.

You've explained it enough.

Okay.

I'm not going to hold you to anything and I understand the connection.

Good, okay.

And that's all I have -- oh, you know what? I did have one final one for Jean.

Thank you for thinking of me.

Sure thing. I was just curious, that agreement with Lanvin, the discussions, was that initiated by you or something that Lanvin had thought of and came to you?

This happened very quickly. Again, as I said before, Lanvin was looking for outside partners to invest in their company because of their growth. So we went to the owner and we said that instead of opening the capital of a company, why don't they sell us the trademark for [unintelligible]. And after a couple weeks of negotiations, we were able to come up to a deal.

We were very -- we were thrilled because of course, we're going to make money just be [setting] the royalty, etc. but also, we are in charge of the frequency of launch. If we want to do a Lanvin store, we can do it. If we want to do two women's and no men's, we can do. We have much more flexibility than when you are a licensee.

All right, that's all I have. Thank you very much.

Thank you. Thank you, Mimi.

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

Okay, again, thank you for your participation on this conference call, whether you're on the call live or listening via our webcast. If you do have additional questions, as always, I am available by phone. Thank you, once again, and have a great 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.