Interparfums Inc (IPAR) 2007 Q3 法說會逐字稿

Good day, everyone, and welcome to the Inter Parfums third 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 mode. I would now like to turn the conference over to Mr. Russ Greenberg, Executive Vice President and CFO. Please go ahead, sir.

Thank you. Good afternoon and welcome to our 2007 third 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 e-mail a copy to you. Before proceeding further I want to remind listeners that this conference call may contain forward-looking statements which involve known and unknown risks, uncertainties and other factors that may cause actual results to be materially different from projected results. 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 31st, 2006, and the reports into Parfums files 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. As most of you know, when we refer to our European-based operations, we are primarily talking about sales of prestige brand name fragrances which are conducted out of France. When we discuss our United States operations, we are referring to sales of specialty retail and mass market products.

Moving on to our record third quarter financial results, as we reported, net sales rose to a record $102.3 million, up 14% from $89.7 million in the same period last year. At comparable foreign currency exchange rates, third quarter net sales were 9% ahead of last year. Third quarter sales by our European-based operations were $88.1 million, up nearly 16% from $76.1 million in the prior year's third quarter. The increase was due in great part to the launches of the Roxy and Paul Smith Rose fragrance lines and the increasing contribution of Van Cleef & Arpels fragrance. Shipments by our four majority owned European distribution subsidiaries, which have been in operation since mid-first quarter, also factored into our European-based sales growth. U.S. sales increased 4% to $14.2 million, which may seem modest to some, but keep in mind that in last year's third quarter we made first time product shipments to all of Banana Republic's North American stores. In fact, in the 2006 (sic) third quarter, U.S.-based sales were 64% ahead of those one year earlier.

Before I go further, I'd like to point out an important difference between the initial product launch for Banana Republic as compared to the initial product launch for the Gap. Banana Republic products were shipped to all of their North American stores at the same time. Gap products on the other hand have been phased in over time. One last point relating to sales, as we stated in our second quarter conference call, prior to establishing majority-owned distribution subsidiaries and our entry into the specialty retail arena, seasonality was not much of a factor in our business. Based upon our annual sales guidance, you can clearly see that the second half is expected to be more seasonal than it has in the past.

Moving on to profitability measures, gross margin in the third quarter 2007 rose to 59% from 54% in 2006 with the improvement due to the higher wholesale selling prices reported by our four majority owned distribution subsidiaries as compared to historic ex factory sales to distributors as well as the effect of the higher growth rate of higher margin European-based fragrance sales compared to U.S.-based sales.

SG&A expense as a percentage of third quarter sales was 47% in 2007 as compared to 44% in 2006. Promotion and advertising included in SG&A aggregated $15.9 million for the current third quarter, up 16% compared to last year's $13.1 million, while royalty expense included in SG&A aggregated $9.1 million, down about 13% from $10.5 million in last year's third quarter. As discussed last year, royalty expense for the three months ended September 30th, 2006, included a catchup amount of approximately $1.5 million resulting from the September 2006 Burberry license amendment, which among other matters simplified the method of calculating royalties and was retroactive to January 1st, 2006. The balance of the SG&A increase relates to the operating expenses of our European distribution subsidiaries.

Third quarter net income increased 22% to $5.7 million from $4.6 million and diluted earnings per share were $0.27, up 17% from $0.23 per diluted share. Before passing the call over to Jean, I would like to point out that inventory levels at the close of the third quarter of about $101 million were very much the same as the start of the third quarter. Reasons for inventories to be at these levels will become more obvious as you hear Jean discuss the launched schedule for the fourth quarter and coming year. Now I will turn it over to Jean Madar, our Chairman and CEO.

Thank you, Russ. I thank you for your participation on today's conference call. The roll-out of the Gap collection of bath and body products that began in the spring is now essentially completed, with final approximately 300 Gap stores shipped in October. Also the six Eaux de Toilettes that debuted this summer at Gap stores can now be found in about 650 Gap store locations. The newest item in Gap stores are called Individuals, with our five high end fragrances for both men and women named and packaged to define individual personalities that should be (inaudible) visionary and the original. These are the high end of the fragrance spectrum in terms of [new] package and bottle design. At many Gap stores, you will also see that the icon fragrance -- namely the ones up there before we took over the [category] have been transformed and refreshed by us. Gap stores are now able to offer its customers olfactory and price choices from (inaudible) at the lower end, Eau de Toilette in the middle, and this line called Individuals at the higher end.

In late summer three new men's fragrances called [Bold, Spike and Mixed] were introduced in Gap adult stores. We created and introduced an extensive men's grooming and skin care collection as well. Perhaps some of you have seen the Banana Republic windows picturing the two additions to our Discover Collection called Malachite for women and Cordovan for men. We also have added several scented candles for sales in the limited autumn season addition. Similarly, you will have a new winter seasonal candle in stores shortly. Over previous seasons, a total of six different gift sets will be available for men and women. We've enjoyed the very productive collaboration with New York & Company. The aggressive timeline was met and New York & Company's 570 stores will shortly display and sell a line called City Beauty with 30 bath and beauty SKU along with holiday gift sets.

Moving on to our European operations, Paul Smith Rose and our first Roxy woman's fragrance were launched successfully. As we disclosed yesterday, for six Burberry fragrance family, the Beat will debut with the women's start in March 2008 followed in 2009 with a men's version. There is also a new woman's Van Cleef & Arpels scent, two more Roxy women's fragrance called Love and Heart and the Quiksilver skin care line and a men's fragrance line in the pipeline. Additionally, the 2008 lineup includes limited edition men's and women's fragrance for Paul Smith, the Lanvin women's fragrance and the newest S.T. Dupont fragrance for men and women. We continue to explore additional specialty retail opportunities, also licensing, as a means to profitably grow our business.

Having affirmed our 2007 guidance, we plan to announce our initial guidance for 2008 later this month most likely on November 28th. Also worth mentioning is an honor that [Inter Parfums] received in September at the HBA Industry Awards called Recognizing Creativity from International Cosmetic News. Inter Parfums won the award for its original and creative contribution to the cosmetic and fragrance markets.

Before taking your questions let me share with you some other upcoming presentations. We've been invited to address the Bear Stearns SMid-Cap Conference in New York on November 14. Then on December 12, we will be presenting at the Wedbush Morgan California Dreamin' conference and the following month we'll be at the Cowen and Company Sixth Annual Consumer Conference in New York which runs from the January 15th to the 16th and we will be at Sidoti Company's Palm Beach conference on January 22nd. We hope to see some of you at these events. Since in all likelihood our next conference call will be March of next year when I want to extend my best wishes to all of you for a joyous holiday season and all good things for the next year. So now, operator, we can open the floor for questions.

(OPERATOR INSTRUCTIONS) Your first question comes from Linda Bolton Weiser with Oppenheimer.

Thank you. Can you just comment a little bit, Russ, you've been talking a little bit about the seasonality of the business and how that's shifting? Given the big launch of the Burberry fragrance in the first quarter of '08 do you think that the seasonality will still apply for '08? Or is that going to be changed because of the launch? Can you just talk about that a little.

Yes. Certainly historically it always appeared that we were more seasonal than we actually were because many of our product launches usually occurred in the third and fourth quarter of the year. With respect to Burberry's launch in the first quarter, certainly it's going to help first quarter sales, but keep in mind that you don't launch globally in every country simultaneously. You would normally start in certain key countries and that's why it certainly will affect sales and then you will continue out into a more global launch of that product as the year goes on. So all in all, yes, I think it's going to impact the first quarter a little bit. It's certainly going to help our comparisons in the first quarter, but I don't think it's going to have a significant effect on what's now moving towards a much more seasonal third and fourth quarter of the year resulting from the distribution subsidiaries as well as the specialty retail business.

Do you plan, is the schedule for the Beat launch to be completed by the end of second quarter or will it continue even through the second half?

It should be completed by the end of the second quarter, meaning it will be in all the countries and all the doors that we plan on having the product sold. It will be in those doors by the end of the second quarter of 2008.

Okay. And can I just ask one question on the Gap and Banana Republic business? It does seem the Gap continues to go through strategic changes and I believe they recently restated their target consumer to be slightly older than the 18 to 24-year-old they were targeting previously. It seems to me that that may involve some changes in their strategy with regard to personal care, perhaps a revamping of the line or additions or deletions from the line. Is there any light you can shed on that right at the current time?

I don't see the change in the core customer of Gap. I think an impact on personal care -- we have now created a (inaudible) for the Gap. We have more than 100 SKU. This offering is wide enough for a lot of consumers to find what they are looking for. We will continue, of course, to edit. We'll take out certain smells and replace it by other as we would do in any other business. But, no, it's too early to -- we just launched the line officially in all the doors that we want it to be in. (inaudible) adjustment before we see how the business goes.

Am I mistaken, but I had thought originally that the plan was to be in all Gap stores, whereas now it seems like the universe of stores is a little bit smaller and I thought the roll-out would extend into '08 originally? Am I mistaken or has there been a change in the plan?

There is no change in the plan. We never said that the roll-out would extend into 2008. We said the roll-out would be done by the end of the year, but there are I would say 200 to 250 stores that are the smaller stores. Of the one, that I heard will be renovated or also will be closed, that we have decided mutually not to go in.

The only thing I'm going to add to that, too, is we have always said for 2007 the roll-out which began in Body stores and then went into 500 additional adult locations, that was the extent of the launch for 2007. I do know that as a result of the success of the individual line and the men's line, that that has been expanded and that will go into over 200 additional locations that is shipping in November. So if anything, they are evaluating the product line and improving the distribution where the successes were.

That's true. I forgot that we have added the Individuals and the men's which has been apparently very successful in the first couple of weeks of introduction. So during the holiday season where we feature it -- which will be a good way, by the way, to see how we can -- if we can do some business through the rest of the chain.

The last thing I'll say on that, I believe that as a result of the launch, the products are in about 780 different doors or will be by the end of the year, which is pretty much the universe of doors that you would want to be in that encompasses all of the AB and even some of the C doors at Gap.

Can you give us --

Changes.

It's a difficult thing because you have adjacent doors. Sometimes you have in multiple locations. Sometimes you are in the Gap stores which are adjacent to the adult store which are the men's and the women's locations. So in terms of fixtures we have many, many more fixtures than the 600 or 700. Okay?

Okay. Thanks a lot.

Thank you, Linda.

Your next question comes from Neely Tamminga with Piper Jaffray.

Hey, good morning, you guys, and we wish our best holiday wishes to you guys as well.

Thank you so much, Neely.

So just want to ask a few questions in terms of inventory sourcing and just a couple housekeeping items. I might have missed this in terms of lost in translation a little bit, but did you actually break out the dollar amount of the inventory overage, of how what's kind of normalized inventory and then what's the flowing into stores inventory? Have you looked at it that way so we can kind of understand what the underlying inventory is going on right now?

We have not evaluated our inventory to those kinds of details.

Can you speak about it maybe just conceptually a little bit? Not specific dollar amounts but just wondering, would you then be up only 20% or I'm just trying to figure --

That's a very difficult thing to answer off the top of our heads. You have to keep in mind when Jean went through a litany of new product launches that are going into play for 2008, each and every one is evaluated individually with respect to the inventory needs. So to be very generic is almost impossible because it's really the sum of many, many moving parts. We have to maintain a certain amount of inventory for our specialty retail business to make sure that we're in stock on the items. And with respect to new products launches, there's a long lead time with which to bring components in, all right, in order to have those components so they can be manufactured so we have the finished goods on a timely basis to the launch. It's very complicated and we work -- there's many, many people involved in monitoring and maintaining those inventory records. We've been doing it for 20 years now. We think we're pretty good at it. At the beginning of the year we indicated that we will have a huge commitment for inventory as this year goes on and I think the numbers are just coming in in pretty much as we expected that they would continue to grow. The last thing I want to say on that is the Burberry Beat launch, which is going to occur in January and February of 2008, the inventory requirements that those have as of September and will continue to have through December are substantial because of the size of the launch that this is going to represent for our company.

That's helpful, Russ.

I hope so. Thank you.

I would say a couple more questions, then. One would be related to [floor scene]. I'm wondering just generally speaking as you're having discussions with some of your vendors whether it's bottles or all the different components, juices, what have you. Do you get a sense that pricing is going up for '08 and are there things you can do to help mitigate that pricing increases?

I think throughout the components that we use there's always certain components where you do see increases of prices. Certainly the fact that oil has risen to the extent that it has, it certainly has an impact on plastics and on glass and things of that sort. The one thing I will say, though, is that in our business, although we especially in the mass market we're very susceptible to price increases, it's a little bit less of a significance in the prestige products that we make. The cost of sales for it to fluctuate by 1% or 2% as resulting from prices is probably the most that you're actually going to see, and that's in an environment where you do have a lot of inflationary pressure as a result of the oil situation.

But on the launches -- particularly the Burberry launch for next year, I mean is there a thought process of actually making the initial pricing of the Burberry product higher than where you've been in the past to kind of make up for some of these price increases.

Oh, no, no, no. We would not do that. The competitive forces that exist in the retail marketplace will dictate the prices that Burberry can sell at or that Lanvin can sell at or Paul Smith. When we create, we might make modifications in our manufacturing process in order to mitigate some incremental costs, but you're not going just raise prices because there's a small increase on source of goods.

No. The positioning of the Beat is done not because of cost of goods. It's done based on what exists in the family and where the competition is. So we rarely change prices because of the cost of goods.

Okay. And just two more kind of housekeeping questions, Russ, and we can follow up offline if you want to on these. But just wondering in terms of gross margin from change in distributing, et cetera, should we start to see something normalize here or how should we be thinking about gross margins over the next couple quarters?

Yes. I think as we get into 2008, you'll see a little bit more normalization. What you basically have here is the fact that we're utilizing our own distribution subsidiaries, those subsidiaries -- the incremental sales are benefiting our margin. But the costs of those subsidiaries or the servicing costs that we pay the existing distributors are absorbing that benefit on the SG&A line. We've always said that the profitability of the distribution side of the business is not going to be tremendous. It's going going to add to any great extent -- it's not going add to any great extent to the bottom line, but the pieces are different. So what we're seeing is a 2 to 3 to sometimes 4% benefit on the gross margin line and that is being absorbed as an increase on the SG&A line. As we go into 2008 and as we anniversary this effect, we will get into a much more normalized situation with respect to gross margin. The only other thing that I just want to add and again it's a function of things that we've always said in the past. And that is that the prestige part of our business is the highest margin product. The specialty retail is right in the middle around that 50% and the mass market is on the lower end. So gains like we had in this particular quarter where sales were up 16% on the European-based business or prestige fragrance business versus 4% on U.S. side, you're certainly going to see a little bit of a benefit on the gross margin as a result of that product mix.

Okay. That's actually very helpful, Russ, and then just the easy question, what should we be looking for for tax rate?

On the tax rate that we achieved in the third quarter which was around 34%, I think anywhere between 34 and 35% is where we're going to be.

Okay. Great. Thanks. Good luck and have a great holiday.

Thank you very much.

(OPERATOR INSTRUCTIONS) Your next question comes from Mimi Noel with Sidoti.

Hi, Jean, Russ.

Hello, Mimi.

I would first like to ask about the G&A expense and royalty aside, A&P aside, distribution, added JV cost -- was there any surprising or material increases in your baseline G&A?

Was there any? No. I think that --

You had said in your prepared remarks that beyond royalty, beyond A&P, the change in the overall G&A was largely or if not exclusively attributable to the JVs.

Right. Because that did not exist. I'm sorry. I'm sorry. Those expenses did not exist in 2006.

Right.

And as I just mentioned to Neely in analyzing the benefits of the gross margin, you get a 2 or 3 or sometimes even a 4% gain because of the sales of the JV. Those selling expenses relating to those sales are taken away so that your net profit is pretty much a break even for the incremental revenues that you get on those distributions of sales.

Okay. I just wanted -- my angle was just I wanted to make sure that there weren't any increases that I should assume based on some of the expansion.

No, no, no absolutely not. It's pretty much as we've originally projected at least from our standpoint.

Okay. And then two or three more questions. That legacy mass business before that you went into the specialty category, it was a declining business. Is that still the case? Can you tell me what the size is approximately?

I can't go into the details with respect to size. It is a relatively small part of our business, but as I've said in the past and as we even said in the 10-Q this quarter, this business continues to decline.

Okay.

Once again we haven't made a decision to abandon it. So certain benefits we see from it but we haven't been able to find a cure, if you will, at least not yet, but we are working on it.

Okay. And another question I had, I think when you were first renegotiating the Burberry license, another sort of makeup measure that you were considering was vendor consolidation, if I remember correctly. Is there any follow-through or any update on that?

Vendor consolidation.

What's that?

Along your supply chain. Am I remembering incorrectly?

No, no, no. We said that we were going to get some help from suppliers and I think that we have seen an improvement in cost of goods over the last I would say 12 to 18 months. The fact that we are still using the same -- we try to use the same suppliers over. However, prestige and for the specialty stores is helpful, is helping all divisions.

Yes. The only other thing I want to add to that is you would have seen those benefits from the concessions that we got from certain vendors and things like that. In fact, in 2005 because that's where we were hit with the incremental royalties and to mitigate, if you remember correctly, what we were trying do is to mitigate the incremental expenses in connection with that new license with Burberry and all of that kind of happened back in 2005.

Okay.

So yes, it continued a little bit but most of that is history.

Nothing more recent than that, okay. And then I do have one last question. It's probably more for Jean. What can you tell me that's new or exciting about the Beat relative to the latest family?

The Beat is quite an exceptional product because we have enormous expectation on the Beat for a couple of reasons. Number one, it was a challenge to come up with something and after Burberry London.

Right.

So as you remember the first Beat worldwide launch was really Burberry Brit followed by London using the plaid printed either on the bottle or printed on the fabric. So what I can tell you about the Beat, it's a redefinition again of what Burberry stands for and modern heritage, very, very British, but very modern priced -- from a price point of view it's at the high end of the family and the advertising is very strong. We're going to have to get a TV [interface] in the UK. It's still young, not just for young customers. You're going to see very soon we are looking to launch it in the U.S. I would say end of January, beginning of February.

Okay. And has there been any initial feedback from the retail end? Have they gotten a sneak peek at the product?

Yes. We made the major presentation two weeks ago to our worldwide distributors and we had also some department stores were involved worldwide. The level of excitement is very high. It was for because for all these department stores and distributors, they always had best with Burberry. We are curious to see what we can do after Burberry of London. I think they are happy [years].

Okay. That's very helpful. Thank you very much and I hope to see you guys soon.

Thank you.

Your next question comes from Linda Bolton Weiser with Oppenheimer.

Thank you. Just another question on Burberry. Can you quantify in any way how much the European sales in the quarter were up or down or whatever excluding the effect of the joint venture formation?

Excluding the joint venture, no. We have disclosed that for the third quarter the Burberry business was flat, and we indicated that it was flat because of the difficult comparison with the London launch that existed in 2006, but we do not provide a breakdown with or without the JVs or anything like that.

So excluding the formation of the joint ventures clearly the sales are down, then, for Burberry?

You're making an inference that we're not prepared to either say yes or no. It's an inference that you're making. All right? We can only discuss what is disclosed and I just explained exactly what was disclosed.

Because I'm just trying to think about how we should think about that franchise long term. Should we think about 5 to 10% growth in a year where there's a major launch and then flat to down in a year with no major launch?

Well, I think what we've always said and what we attempt to do is on a year by year basis to grow internally at a 10% rate. Can you do that on every single line every single quarter? No. When you have a comparison of no launch versus the launch of Burberry London last year, it makes for a difficult comparison and we're not surprised by the results. All right? But as far as inferring what sales were with or without the JVs, I think that the analysts are capable of doing that themselves.

Okay. And just also on Burberry, I didn't hear all of Jean's remarks. He was a little faint in his volume level there, but is the Beat -- do you anticipate it being less or more cannibalizing of the other fragrances than London was?

I think that London had certain cannibalization under it, but I think Brit, London and Beat belong to a new direction for Burberry -- something more modern, more up to date, more iconic, more fashion as opposed to Burberry Touch, Burberry Weekend, Burberry Classic which are more heritage. So we I think that we are not expecting cannibalization between the new Beat and the Burberry London or even Burberry Brit because we think it's a direction that the Burberry customer wants us to go into.

Okay. Great. Thanks. It sounds like it's going to be good. Thanks.

Thank you, Linda. Any other questions from the floor?

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

Thank you, and again thank you for your participation on this conference call whether you were on the call live or listening via our webcast. As always, if there are additional questions, I am always available by phone. 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.