Interparfums Inc (IPAR) 2008 Q1 法說會逐字稿

Good day, everyone, and welcome to Inter Parfums's First Quarter 2008 Conference Call. At this time, I would like to inform you that this conference is being recorded, and that all participants are in a listen-only mode. I will now turn the conference over to Russ Greenberg, Executive Vice President and CFO. Please go ahead, sir.

Thank you, Operator. Good morning, and welcome to our 2008 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 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's Annual Report on Form 10-K for the fiscal year ended December 31st, 2007, and the reports Inter 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 first quarter financial results. As we reported yesterday, net sales rose 45% to $123.2 million from $85.1 million. At comparable foreign currency exchange rates, net sales were up 35% for the period. European-based operations achieved sales of $110.6 million, a 46% increase compared to $75.6 million in the same period last year.

Burberry fragrances were the star performers in the first quarter, with most of the sales gains due to a 53% increase in Burberry fragrance sales. The huge success we have thus far had with the worldwide launch of Burberry The Beat was all the more gratifying because the brand's existing lines also produced sales gains, enlarging the universe of Burberry fragrance customers.

Also worth noting, sales of Van Cleef & Arpels' products more than doubled, as brand sales increased 175% to approximately $7.7 million from $2.8 million in the first quarter of last year.

Sales by our U.S.-based operations rose 31% to $12.6 million from $9.5 million in the same period last year thanks to new products, adaptations of existing products, as well as replenishment of stock for our specialty retail partners. Also, sales growth reflects international distribution of Gap and Banana Republic products.

Moving on to first quarter profitability measures, gross margin was 60% in this year's first quarter, as compared to 61% in 2007, with the slight decrease attributable to the effect of the decline of the U.S. dollar against the euro on European-based sales to U.S. customers. Sales to these customers are denominated in dollars, while our costs are incurred in euro.

SG&A expense, as a percentage of sales, was 45%, compared to 47%. Promotion and advertising included in SG&A expenses aggregated approximately $16.6 million, or 13.5% of net sales, compared with $12.5 million, or 14.7% of net sales in last year's first quarter.

As we noted in yesterday's news release, 2008 first quarter sales include a significant contribution from the launch of Burberry The Beat. However, advertising expenditure requirements pursuant to our license with Burberry does not require such spending to be incurred until our distributors sell such products to the retailers. As a result, look for the second quarter of 2008 to bear a significant portion of such required advertising expenditures.

Royalty expense included in SG&A expenses aggregated $12.2 million, or 9.9% of net sales. In last year's first quarter, such expense was $9.6 million, or 11.3% of net sales.

Operating margins in 2008 were 15.4% of net sales, as compared to 14% in 2007.

Net income increased 50% to $8.7 million from $5.8 million, and diluted earnings per share were $0.42, up 50% from $0.28 last year.

Before passing the call along to Jean, I'd like to mention that our Board of Directors approved a 3-for-2 stock split in the form of a stock dividend to shareholders of record as of the close of business on May 15, 2008. After this distribution, there will be approximately 30.6 million shares of common stock outstanding.

Jean, why don't you continue?

Sure. Thank you, Russ. I join Russ in thanking you for your participation on today's conference call. Russ is in New York and I'm in Paris today. I would like to focus some of my discussion on the international distribution agreement that we announced last week with Gap, Inc.

For our network of distributors across the globe, the personal care products that we develop and produce for North American Gap and Banana Republic stores, are going to be sold at company-owned Gap and Banana Republic stores in Europe and also franchise Gap and Banana Republic stores in Southeast Asia and the Middle East and also in department stores, perfumeries, duty free, and in-flight airline stores, military bases, and other brand-appropriate retail outlets.

A portion of the increase in our comparable quarter sales growth relates to international distribution, which took place in the current first quarter and actually began on a modest scale late last year where we test marketed certain products at select European retailers. Banana Republic personal care products are now in about 30 U.K. department store locations, including House of Fraser, John Lewis, and Harrods.

Those of you who do a fair amount of flying may have seen our products on Delta Airlines, American Airlines, Continental Airlines, and Canadian Airlines. They're all selling Banana Republic personal care items in their in-flight listings.

I should also mention that Banana Republic and Gap personal care items are currently available at about 119 military stores on American military bases across the globe.

Gap, Inc. and Inter Parfums believe that personal care products are a great way to increase the reach of brands and build awareness for brands in international markets. This new dimension of our agreement with Gap, Inc. resembles the one we have in place with Brooks Brothers in that we do actually supply company-owned stores in North America and at the same time utilize our distribution network to place product in certain retailers in certain countries around the world.

We are also regularly exploring additional avenues to expand our specialty retail business and we are in discussions with a number of prominent retailers. While we cannot give any assurance whether other agreements will be signed, we can assure you that every effort is being made to expand this very important part of our business.

During our last conference call in March, we discussed Burberry The Beat, including the concept, the target market, and its initial success. We are delighted to report that this success is continuing and The Beat is our best ever new product launch. I hope you will visit Burberry's Web site to see the TV ad, music video, and related marketing links for Burberry The Beat.

Also on our last conference call, we recapped our new product launch scheduled for 2008 and we did it again in yesterday's news release. Back in the U.S., we are making excellent progress on the Brooks Brothers collection. The first two products, the men's and women's fragrance, are on schedule for launch in November 2008 at 200 Brooks Brothers retail locations in the U.S., followed by international distribution beginning in 2009.

Based upon the strength of our first quarter and the expectation of growth for the balance of the year, we have increased our 2008 guidance. We are now looking for net sales of approximately $460 million and net income of approximately $26.8 million, or $1.30 per diluted share on a pre-split basis. As we have said in the past, this guidance assumes the dollar remains at current levels.

Before taking your questions, let me share with you some of our upcoming presentations. We will be speaking at the 28th Annual Piper Jaffray Consumer Conference taking place in New York on June 10th and 11th. And in New York, we're going to rearrange our schedules to attend Oppenheimer conference in Boston in July. Russ will be on the road with Sidoti in Cleveland on May 16th and in Boston with Wedbush Morgan on May 20th. We hope that we'll get to meet some of you in person at these events.

Operator, I think we can open the floor for questions. Operator?

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Joe Altobello with Oppenheimer.

Yes, hello, Joe. Joe?

Operator, have you opened his line?

Yes, sir, his line is open.

All right, then let's move on to the next question, or is there something wrong with your system?

Your next question comes from the line of Linda Bolton Weiser with Caris.

Linda?

Operator, you have to take them out of listen-only mode.

Linda, your line is open.

Can you guys hear me?

Now we can.

Yes, we can now.

Can you hear me?

Yes, I can, Linda.

Okay. The tax rate in the quarter was just a little bit higher than we all expected. Can you just clarify if that is one-time in nature or if that will continue to be higher and should we use -- what should we use for the rest of the year for tax rate?

Well, as we stated in the 10-Q, within the MD&A, we talk about the tax rate in that we established some valuation reserves for taxes that -- tax assets that resulted from some losses in the four distribution subsidiaries during its first year of operation. That charge was taken in the first quarter. That is something that we are not anticipating that it will recur. So, as far as the Company's projections are concerned, we are basically going back to a normalized tax rate, which ranges anywhere between 35 and 36%.

Okay, great. And, then, it just seems like given the strength in the sales in the quarter that, I mean it seems to me that your sales guidance seems still a little bit conservative. I know you were expecting the additional Gap international agreement in sales, but I wasn't in my model. So I'm finding that to add that in, I have to lower some other things and it just seems all really conservative. Are you sensing weakness in your markets or in travel retail and you're just trying to be conservative or can you give a little color?

Russ, do you want to start and --

We have not, as you can tell even from the first quarter, we are not seeing weakness in our markets at all. We have a very aggressive launch schedule for the year. We have been working with Gap on military and international since July of 2007. And the agreement that we signed with Gap is actually effective July 2007. So, as far as we're concerned, this has been part of normal operations. How you build your model is how you build your model.

No. And I would like to add that all the segments of our business are growing. We anticipate some strong sales coming from international. Of course, there is a certain -- there is, how should I say, an environment, an economic environment, which is not great and I think it's important to be conservative, even though we see some strength in all of the segments of our business.

Okay. And just can I ask a question on the gross margin? I mean, you explained in the 10-Q a lot of details about that and why it was down. Could I assume, then, that the phenomenon with the euro and your cost situation, as the comparisons ease a little bit through the year, that will maybe improve the gross margin as the year progresses? Is that a rational conclusion?

It's rational, but keep in mind that there are several different factors that are going to influence gross margin. Growth rates in specialty retail compared to growth rates of prestige products also has an impact on gross margin. As everybody knows, because I've said it many times, that the highest margin product are in the prestige, all right, and there are some differences between the different lines within prestige as well. In the middle of the road is your specialty retail, which runs at approximately a 50% margin. And then you have the mass-market business, which is between a 30 -- around 30, 35, 40% margin, depending upon the line. So product mix is going to influence it. And, as happened in the first quarter, the strength of the euro against the dollar, that is also another factor, and that seemed to play the largest role in this first quarter of 2008.

Right. Okay, great. I'll let other people go. Thank you very much.

Thank you.

Thank you, Linda.

Your next question comes from the line of Rommel Dionisio with Wedbush Morgan.

Yes, good morning. Could you guys just discuss the New York & Company business? How that -- some responses in the first few months and (inaudible)?

Sure. As you know, we have introduced a full line of personal care in the month of November of 2007 at all the stores of New York & Company. In the first quarter of this year, we have test marketed a line of color cosmetics, which is doing very well. So we'll continue to increase the presence of color cosmetics at New York & Company. And we are on projections for sales this year with NYC.

Good. Thanks very much, Jean.

No problem.

Thank you, Rommel.

Your next question comes from the line of Joe Altobello with Oppenheimer.

Finally Joe.

Hello?

Hey, Joe.

Hi, can you hear me?

Yes, I can.

Yes.

I actually asked a great question. Unfortunately, nobody hear it. But anyway --

Too bad, too bad.

In terms of the specialty retailers that you guys are in discussions with, obviously you can't divulge too much, but if you could tell us sort of what types of retailers they are, whether they are upscale or downscale from where you are now?

We really can't discuss anything --

No.

-- on deals that have not been signed at this point in time.

Are they international retailers?

It really wouldn't be appropriate.

Are they international? U.S.-based?

We're looking at both. Some are U.S.-based, some are international. Very consistent with what we have done so far.

Okay.

All right? And we --

I would like to add that I think that the business model that we have established for Gap and Banana Republic is really working. And we have been contacted by many retailers. We are very selective in our approach, so we cannot suggest to everybody, but there are definitely certain candidates that make sense. Like Russ said, from a domestic point of view and also from an international point of view.

Okay. And this is a bit of a softball, but I'll ask it anyway. If you look at other fragrance companies that reported in this quarter and I guess last quarter as well, a lot of them have been pretty weak on the sales line. I was curious what's really driving the difference between their businesses and yours? Is it your brand? Is it your channels? Are you targeting a different consumer or different geography? Because the difference is striking.

You know it took us 15 years to build a balanced portfolio and now we are looking at the results of a balanced portfolio, a very high-end brand name, such as Van Cleef & Arpels; very worldwide recognized name like Burberry; niche brands like Paul Smith; specialty retails stores like Gap and Banana Republic. I think this quarter is a good picture of all the efforts that have been made in the -- over the last years. And of course the strength -- the weakness of the dollar is a plus for us because a lot of our sales are in euro, and so it plays a big piece. But I would say again that it's not an accident, it's well thought work.

Okay, fair enough. And, then, in terms of, Russ, your comments earlier about seeing weakness in your markets, or actually not seeing any weakness in your markets, any early signs of maybe consumer weakness there in the second quarter or any retail de-stocking, anything like that?

It's very difficult to carve that. I would have to say the answer is no. When we see that the launch of Burberry The Beat happened during a period when we were able to continue to grow the existing lines of Burberry, kind of tells us that, for at least the brands in our portfolio, we're really not seeing weakness at this point in time.

Okay. And, then, lastly, if I could, the guidance now, since January, you were up, what, $23 million on sales and about $0.14 on EPS. Is the raise in guidance twice now mostly due to The Beat launch or are there other factors, foreign exchange for example?

Oh, certainly, foreign exchange plays a role in our guidance. As you remember from even the last conference call, we basically look at a picture of a three to six-month period, historic period, in order to work through our guidance. At this point in time, we know that the first three months of 2008 are behind us. So, certainly, that has to play some role in it, but it's really a combination. We're looking at what -- where do we think the average rate of the dollar is going to be for the year? Where do we think our business is going to be? What launches we have coming out during the year and when are they going to launch? What countries are we going to put the product in? All of that is all taken into consideration. And as we continue to see strength in our business and/or weakness, we will continue to update our guidance.

But the driver is really The Beat?

The driver --

I'm sorry. The driver is The Beat, but because we are -- of their projections, but I will say that the agreement that we have announced last week, we've -- the international agreement with Gap is also an important part of our domestic growth.

Okay.

So I will say that, I don't know if you agree, Russ, but these two are the main drivers of raising the estimates.

Absolutely. And in connection with the international agreement with Gap, one of the key aspects of it, although, as I mentioned earlier, it was signed effective July '07, the actual signing of it is a major accomplishment. Because now all of the markets are really open to us, all right? The markets that Gap, Banana Republic, and Inter Parfums think that their product can actually infiltrate. So it does open up a lot of doors at this point in time.

Okay, thanks, guys.

Because Gap and Banana Republic have stores internationally and we've seen a great appetite from international operators to carry Gap products, either in the Middle East or in Brazil or in Russia, for instance, Gap is an icon of America and we think that we can have some very, very impressive numbers internationally with Gap in the next 12 to 18 months.

Got it. Thanks.

Thanks, Joe.

Your next question comes from the line of Mimi Noel with Sidoti & Co.

Can you hear me?

Got you, Mimi.

All right, all right. Russ, you mentioned a number of doors with the expanded Gap agreement. Can you specify the number of franchise and corporate-owned stores internationally? And that excludes the other department stores, etc.

Oh, yes. But keep in mind the agreement is not only Gap and Banana Republic stores, because it does open it up to international retailers --

Yes.

-- military and so on and so forth. As far as Gap stores internationally, and, Jean, you can correct me if I'm wrong, but for Banana Republic, there's approximately 40, with a concentration in Western Europe. And on Gap there's --

Japan for Banana Republic.

Japan and --

And one store in the U.K. for BR. And for Gap, it's mostly -- for Gap, it's Japan, Europe. These are the company-owned stores or franchised stores. But like Russ says, what is important is that we're going to be able to sell these products in any department store or perfumeries in the world. So you could expect to see Gap and Banana products at Sephora in Russia or over at Galleria Lafayette in [Oquanto] in France. This is I think very, very important contract because, of course, we have a strong domestic business, but we think that the international business of Gap and Banana could be as big as the domestic business.

Okay, that's helpful. And I get your point, but I'm just trying to isolate a number. Could you give me that number --

I think you're better off going to Gap's website.

Okay, will do. No problem.

All right?

Yes, because -- and it's a moving target.

Yes.

They're opening very fast. The international business of Gap is booming.

Okay, okay. And, then maybe two more questions. I just want to verify that the mass business, that's still profitable?

The mass business, from the standpoint of profitability, what we've continued to say is that it continues to contribute to the overall overhead of the U.S. operations. And, therefore, it is still very much a viable business.

I understand, okay. And, also, for the balance of 2008 would you prioritize for me the remaining launches that you have? In terms of anticipated size perhaps.

For the balance of the year?

Yes. I mean, (inaudible).

As you know, we are going to have a very important launch with Quicksilver in September. We have, also, in the fourth quarter a very important launch with Van Cleef & Arpels. We have also launch for Lanvin with Jeanne Lanvin. So each brand, we'll see something new between second, third, and fourth quarter.

Okay. And, then, the last question I have is just if you could refresh my memory. We typically get the launch schedule for the following year in the fall. Is that correct?

For 2009?

Yes. I was just thinking (inaudible).

Yes, sometime during the fall.

Okay.

I mean we usually issue our guidance for the following year at the end of November. So it's usually around that time that we have our launch schedule for the following year pretty much firmed up.

Okay. I'm all set. Thank you.

Thank you, Mimi.

Thank you, Mimi.

Your next question comes from the line of Erin Murphy with Piper Jaffray.

This is Erin sitting in for Neely. Jean, just a quick question for you. You spoke to no -- seeing no slowdown in any of the international or any of the markets whatsoever.

Excuse me. I didn't hear. What did you say?

Oh, in terms of you both spoke to seeing no weakness thus far in any of the international markets.

Yes.

Could you maybe just speak to some of the countries or the regions that are demonstrating maybe the strongest gains?

Yes, I --

The strongest gains -- yes, I'm sorry, Russ. (Inaudible).

If you remember when we released our -- the fourth quarter -- the sales for our first quarter, in that press release, we talked about growth in Europe and Asia. For our prestige products, Asia was actually up around 56%. Europe was up about 33%. Those are probably the two biggest markets with the biggest gains.

And with respect to Europe, is there -- are you seeing a super normal trend with Eastern Europe? Greater than that 33%?

Absolutely.

Okay.

Eastern Europe is doing better than Western Europe, obvious, in terms of growth.

Yes.

But -- and then we say that even in the U.S. we've seen also a growth in our business.

Okay, that's helpful. And, then, just quickly with respect to The Beat, is it fully rolled out globally? I remember on your fourth quarter call, you --

Not yet, no. Not yet.

Okay.

We still have a good amount of countries to open. And this will be done by the end of this quarter.

Okay.

By the end of the second quarter.

And, then, I guess just a quick question on -- you mentioned all the other Burberry lines that you're still seeing solid gains or gains. What's the second highest gainer after the launch of The Beat? Is it London or would it still be Brit?

London is doing -- is still -- is the number two line.

Okay. And, then, I guess my last question for Russ, just a housekeeping. With respect to inventory, I mean it's still up relatively high at 46%. How should we be looking at that for the balance of the year in terms of working through that or is it just in anticipation for the robust growth, or launch year, that you have this year?

Yes, I think the inventory is very much reflective of the launch schedule --

Okay.

-- which is probably one of the most ambitious launch schedules we've ever faced. So I think that as time goes on and as we continue to put product into the marketplace, inventory levels, I believe, will be a little bit lower as we get towards the end of the year.

Okay. Thank you and good luck.

Thank you very much.

Thank you.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of [Mark Batallion] with Finn Capital.

Yes, hi, guys. A few questions. Just to clarify, the sales that you will be conducting on the Gap and Banana Republic products out of the U.S. will be booked into the P&L of Inter Parfums, Inc. or Inter Parfums if they happen, say, in Europe?

Inter Parfum, Inc..

Inter Parfums, Inc.

Okay.

It's part of our U.S.-based operations.

Got it.

Because the products are emanating from the United States.

Got it. Is the rough number, and I'm -- again, I'm not fishing for guidance, but just to get a sense of the scale of the business in '08 of the U.S. business, is the scale of that business roughly $60 million to $70 million? Is that a ballpark number?

We break out our business by segment in every one of our financial statements, Mark.

Yes, I've got it, but if I look at Q1, you've got $12 million in sales, roughly. But it would seem as if there's an accelerating trend, which would not make the $12 million.

We have not broken out our guidance between U.S. and European operations.

Can you give me a ballpark number?

We have not provided that number publicly. No, I cannot.

Okay. The -- according -- I looked at your 10-Q and I looked at the net debt of the business, which comes out at roughly $17 million at the end of March. Can you tell me what the net debt situation of the business -- of the French business was at the end of the quarter?

That's not public information, all right, unless it's put out by the French company.

It hasn't been put out by the French company.

No. That's why we cannot -- we would not give you this information. But we said this last time that you always try to get something that we cannot disclose. So I don't know what you're trying to -- there are very strict rules about the disclosure and we are not going to break it for you or for anybody else.

I'm not asking anybody to break any rules.

Are there any other questions?

And these are not trick questions. These are just -- this is a business --

It's questions about information that's not public. So any other questions?

Okay.

Your next question comes from the line of Linda Bolton Weiser with Caris.

Thanks. Just a follow-up on the international Gap business. Are the product lines that are going to be carried in those stores and outlets the same number of SKUs, the same price positioning as in the U.S.?

The products are going to be the same in U.S. and international, but we will adjust country by country the retail price, depending on the currency, depending on the custom duties, etc.

Okay. And, then, you used to, if I recall, you used to have as part of your agreement with the Gap a part of the agreement that bars you from making supply agreements with certain other retailers that are positioned closely to them. And without naming names, I mean is that still the case? Is there, like, a little short list of retailers that you cannot partner with because of the Gap agreement?

There is a short list, all right? And, as a matter of fact, as any agreement, there's always changes that take place. For example, Brooks Brothers was on that short list, all right? But we got specific permission from Gap to go ahead and sign a contract with Brooks Brothers. So we're really not too concerned about the companies that are on that list. Certainly, I think that Gap would have a problem if we were to try to sign an agreement with J. Crew. But for the retailers that we have been in discussions with, these are retailers that are not on their short list.

Great. And, then, just one final thing, on the Van Cleef & Arpels, you did mention the sales there being something like, what, 7, $8 million in the quarter. I mean that's looking like it's going to be a 25, $30 million brand for the year. Is there something unusual in the sales in the quarter or am I thinking correctly on that?

No, no, you're thinking very correctly, and we think that Van Cleef has a potential to become the number two line -- will be quickly the number two line in our company. And don't forget that this happened -- these sales happened without any launches of any new products in the quarter. But also remember that last year our inventory was, in the first quarter, was pretty bad on the Van Cleef & Arpels, so we must have missed some sales. But we are very, very optimistic on our Van Cleef business.

Wow; that sounds good. Thanks very much.

Your next question comes from the line of Russ Ewing with Columbia Management Group.

Hello, gentlemen. Thank you for taking my call. Just real quick, I think I'm going back a little bit, but I may have missed the number. Can you quantify the impact of the ad expenditures related to The Beat that are going to fall in the second quarter?

No, we did not quantify.

Hello?

No, I said no, we did not quantify.

Okay, okay. And going forward, are we going to expect that when we see 2Q sales from The Beat that we'll have the same kind of carryover of ad expenditures as well into 3Q? Is that going to be something that's going to be ongoing?

We believe that most of it will probably happen in the second quarter, as our distributors sell into the retailers, but it will carry on into the third quarter as well.

Okay, thank you.

Thank you.

Thank you.

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

Thank you. Thank you, Lynn. And thank everybody for their participation on this conference call, whether you are live or you are listening via our webcast. And, as always, if you do come up with additional questions, I'm always available by phone. Have a great day and thank you.

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