Interparfums Inc (IPAR) 2008 Q3 法說會逐字稿

Good day, everyone and welcome to Inter Parfums, Inc. third quarter 2008 conference call. (OPERATOR INSTRUCTIONS) I will now turn the conference over to Mr. Russ Greenberg, Executive Vice President and Chief Financial Officer. Please go ahead, sir.

Thank you. Good morning, and welcome to our 2008 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 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, 2007, and the reports Inter Parfums files from time to time with the Securities & 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 talk about sales of Prestige brand name fragrances which are conducted out of France. When we discuss our United States operations, we are referring to the sales of specialty retail and mass market products. Moving on to our record third quarter financial results. As we reported yesterday, net sales rose 21%, to $123.5 million, from $102.3 million. At comparable foreign currency exchange rates, net sales were up 16% for the period. European-based operations achieved sales of $108.8 million, a 23% increase, compared to $88.1 million in the same period last year. Sales by US -based operations rose 4% to $14.7 million from $14.2 million in the same period last year, which was when the rollout of Gap personal care products to their North American stores was underway. The comparable quarter increase is primarily due to the international distribution of Gap and Banana Republic products.

Moving on to our third quarter profitability measures. Gross margin was 55%, compared to 59%, with the decrease primarily attributable to the effect the decline of the US dollar against the Euro has on European-based product sales to US customers. Sales to these customers are denominated in dollars, while costs are incurred in Euro. SG&A expense as a percentage of sales was 45% compared to 47%. Operating margins were 9.1% of net sales as compared to 12.1%. Net income was $6.2 million, up 9%, as compared to $5.7 million, and diluted earnings per share was $0.20, up 11% from $0.18 per diluted share in the prior year. Through the first nine months, net sales increased 28% to $345.8 million, from last year's $270.2 million. In constant dollars, nine-month net sales were up 22%.

Despite the challenging economic environment, we have seen a strong year to date growth of European-based Prestige product sales in many markets. For example, through the first nine months of this year, in local currency, sales in Eastern Europe are up 44%, they rose 36% in the Middle East, 32% in South America, and 20% in Asia. These gains more than offset the small year to date decline of Prestige product sales into North American markets. Net income for the first nine months of this year increased -- increased to 23%, to $18.7 million, or $0.60 per diluted share from last year's $15.2 million or $0.49 per diluted share. A couple of points worth mentioning: promotion and advertising included in SG&A aggregated $19.7 million or about 16% of net sales in the current third quarter, compared to $15.9 million or 15.5% in the same period last year.

As we mentioned on the last conference call, first quarter sales included a -- included a significant sales contribution from the launch of Burberry Bebe. However, a significant portion of the advertising expenditure requirements were incurred when our distributor sold these products to retailers which for the most part look place in the second quarter of 2008. Thus promotion and advertising in SG&A of 16% for the current third quarter represents a more normalized rate as compared to the 18.7% in the second quarter, and 13.5% of sales that was reported in the first quarter. I also want to point out that the first nine months of this year, our consolidated effective tax rate was 34%, but for the first six months of 2008, our fact -- our effective tax rate was 39%, as valuation allowances needed to be provided on the deferred-tax assets relating to operating loss carry forwards from our four European distribution subsidiaries.

Effective in the current third quarter, Nickel SA, which had been a wholly owned subsidiary of Inter Parfums SA, was merged into Inter Parfums SA, and as a result of the merger, the company recognized the utilization of certain foreign operating loss carry forwards for which valuation allowances had previously been recorded. As a result, the tax provision has been reduced by a benefit of approximately $700,000. Finally, our inventories at the close of the third quarter were just over $134 million, or about 30% ahead of this time last year, as we build inventory for new launches, scheduled for Q4 and for early 2009. We also reaffirmed our 2008 guidance, which calls for net sales of approximately $460 million, and net income of approximately $26.8 million, or $0.87 per diluted share. As usual, our guidance assumed the dollar remains at current levels, but keep in mind that the dollar has strengthened against the Euro since the close of the third quarter, and a stronger dollar usually has a negative effect on our sales growth, but a positive effect on our margins. As we have in the past, we -- we will again provide initial guidance for the coming year at the end of this month, Jean, please continue.

Thank you, Russ, and good morning, everybody. We appreciate your interest in Inter Parfums and your participation in today's conference call. Burberry brand sales continued to be strong during the third quarter, due in great part to the success of the Beat the new fragrance family whose world-wide launch began in the third quarter with global roll out continuing in the second quarter. Thanks to the Beat, Burberry fragrance set in local currency were 2.9% and 13.6% ahead of the respective period in 2007. The men's version of the Beat is now being sold exclusively at Bloomingdales, started a couple of weeks ago, and in February 2009, we will roll it out to 2600 doors in the US, plus thousands of doors across the globe, as I said in the first quarter of 2009.

Before moving on to our other brands, I would like to say a few words about Burberry, again. Some of you may have seen by (inaudible) October 7th report following the first survey of 7,000 teens and 150 parents on brand preferences and shopping patterns. I was thrilled to see within the fragrance category, Burberry took the second place just after Victoria Secret. In prior semi annual surveys conducted by Piper Jaffray Burberry was in either 7th or 8th place, which quite frankly is still pretty good considering the crowded field in which we operate. Moving on to our second largest brand, Lanvin, the global launch of (inaudible) has begun following it's preview in (inaudible).. Thus far the response has been quite good. Named for the founder of the brand, the new fragrance targets 25 to 35-year-olds sandwiched between the (inaudible) whose core consumer is 18 to 25 year olds and Arpege which has typically appealed to the 40-plus customer.

Moving on to our third fragrance -- third license, Van Cleef & Arpels, we have launched a product called Fury in the third quarter. Starting in July with exclusives at [Marialo] in France, Harrods in UK and Neiman Marcus in the US. On prior conference calls we talked about the high end extreme luxury positioning of each fragrance family with 3.3-ounce au de parfum selling at about $185. Van Cleef & Arpels, our newest prestige line has been performing exceptionally well since we took over worldwide license in January 2007. Sales for the three months ended September 30th, 2008, of products under the Van Cleef & Arpels brand aggregated $11.3 million, an increase of 182%, as compared to $4 million in last year's fourth quarter.

Year to date, Van Cleef sales were $25 million, 150% improvement over the $10 million for the same period in 2007. As Russ mentioned before, the growth in our US operation during the first quarter was due to enter national distribution of Gap and Banana Republic fragrance and (inaudible). For the fourth quarter,the (inaudible) Brooks Brothers we are launching (inaudible) we are launching a fragrance for men and a fragrance for women called Brooks Brothers New York in all 230 US locations. This will be followed in the spring by distribution to Asia and Europe in department stores and specialty stores, as well as in Brooks Brothers international stores and shops in airports.

Before taking your questions, let me share with you some of our upcoming presentations. Inter Parfums will be presenting at Oppenheimer annual meeting and small (inaudible) in New York, then we will also at the Wedbush conference in California on December 10th, and then the Cohen Consumer Conference in New York on January 7th.. We hope that we will get to meet some of you in person at these events. And since our next conference call will most likely be in 2009, when we report fourth quarter and year-end results, November -- end of November, we are going to give our projections for 2009. Russ and I want to issue a happy holiday season and all of the best for you. So operator, you can open the floor for questions.

Thank you. (OPERATOR INSTRUCTIONS). Your first question comes from the line of Linda Bolton-Weiser of [Caris].

Hi, how are you?

Good morning, Linda.

Good morning.

Hi. So just a question on the growth margin, I guess it was a little bit lower than we had thought, and yet the comparison on the Euro versus the dollar was -- it was less negative or onerous than it had been in previous quarters, so I'm just wondering -- I guess your 10-Q mentioned that the gift set mix was high quite and that hurt the margins. Is there anything you can comment on in terms of the gross margin.

Yeah, as discussed in the Q, the primary reason for the decline is the effect of the currency exchange rates, which are down, I guess approximately 10% for the three months. The gift sets certainly also, as we indicated in the 10-Q contributed to a portion of the gross margin decline, and then there's -- there's probably two or three other smaller items which is really just mix of product between our brands and mix of product between the countries that we distributed within the quarter that also plays a roll with respect to our margins.

But I think the most important thing is when we look to the future is exchange rates which are not in our control. We have indicated what the effect of the exchange rate does if the dollar rises against the Euro in the future, which will certainly help us, and the gift sets in a year when you do have the number of new product launches like we do this year, it's not atypical to have a little bit more in that kind of a -- of product sales versus normalized regular product sales, it's not something that I think is going to be reflective of future trends, but certainly it had its impact in the third quarter of 2008.

So I would imagine with the Euro being down, versus the dollar, perhaps in the fourth quarter, we might see a little bit better gross margin performance in the fourth quarter, is that a logical assumption.

That is a logical assumption.

Okay. And then can you just comment a little on cash-flow performance? It -- by my calculation it looks like operating and free cash flow for the year is going to be kind of neutral, perhaps even negative for the full year, and granted that's against a strong cash performance in '07, but are my numbers correct or am I miscalculating that?

No, it's not a question of miscalculating, clearly from operations, we have used a significant amount of our cash to support the working capital. It's very typical for receivables to be very high at the end of the third quarter, and typically at the end of the fourth quarter they are probably at the lowest level that they are for the year, so we do expect to see the accounts receivable come down significantly at the end of the year, which will help the cash flow from operations. The second biggest line which of course is the inventories, there you have a similar situation. It already down approximately 15 to $20 million from the second quarter of 2008.

At year end, we expect it to be up maybe -- similar -- a similar rate to your sales increase, maybe up about 20% for the year in total, based upon the launch schedules in early '09, so I think we'll see the inventories come down a little bit as well. It's -- it's very hard for me to predict, and we really don't issue guidance on cash flow, but typically, the strongest position we are in is at year end, so the use of cash that we see at the end of the nine months, I think is going to be a very different picture at the end of the year.

Do you anticipate repaying some debt in fourth quarter? Or do you think you'll just kind of keep some cash on your balance sheet?

We will probably -- we will definitely repay some of the short-term bank debt. The long-term debt that exists on our balance sheet are all term loans, so those are all paid by the same amount. We pay a set principal plus interest on a five-year term loan payment schedule for all the long-term debt. But with respect to the short-term debt, I do expect it to be down as we approach December 31st.

Great. Thank you very much.

Thank you.

Thank you, Linda.

Your next question comes from the line of Neely Tamminga of Piper Jaffray.

Good morning, gentlemen. Just a quick housekeeping question and questions for Jean. First on the guidance, just to be clear, are you assuming the average Q3 exchange rate or the spot rate as of yesterday's release?

I don't understand --

With respect -- you are talking about with respect to the guidance for the year?

Yes. Yes. Sadly they are very different.

That is really not the spot rate. We have been asked these questions in the past. The reality is we have to use some sort of a trailing average, because we cannot with any certainty predict exactly where the dollar is going to go between now and the end of the year. We know where it was for the last 41 days of the fourth quarter. We don't know where it is going to be for any next 49 days of the fourth quarter. We usually use a blended average over the past, but because of the volatility of the dollar, we have had to -- we made some adjustments to our numbers, but based upon where we stand today, based upon the way we internally analyze the -- where we expect the dollar to be, we are reconfirming our sales guidance at $460 million for 2008.

Okay. Jean, help me understand a little bit in terms of what you are thinking on Bebe. Just --

Thinking on what, I'm sorry?

On Bebe. Bebe?

I'm going to try, yeah.

When will be expect to maybe have a fragrance next year? Would it be in the first half or second half, obviously you guys have done a good job of being able to have a quick turnaround on some of these fragrance businesses, just wondering how that plays without with Bebe's plans specifically. Will we see such of a difference between the core Bebe and Bebe Sport assortment.

Let me try to answer one by one. On the timing for launch of fragrance we are look at third quarter, 2009, so we are look at us shipping in August, and then we start the advertising campaign in August and September. So far it will be shipment for third quarter. It's little bit longer than expected, but the product is quite complicated, and -- and that's why it is going to take us a little bit longer to make it, and then, yes, of course, we there are plans to -- to create other fragrances after we ( inaudible ) Bebe fragrance. We are already working on Bebe Sport, and don't forget we have also for this year, we are going to go to put some color cosmetics in the stores. I think you will see it-- it's in the stores now, actually. It is in the stores now. So we have a full line of lip gloss, and we continue if in first, second, and third quarter with more lead products for Bebe.

And I guess what is intriguing for us on the announcement for Bebe is it is really one of the first US retail brands that you are partnering with that actively uses celebrity faces in their campaign. Will that celebrity transference into the brand be accessible to you? Or is that not at all part of the plan?

We are talking, we are talking, it's possible. But we think that the Bebe name -- I mean, we are using celebrities because of -- because Bebe is a nice tight run and as you mentioned we want to communicate. We can have the celebrities (inaudible) I don't think it's going to change, and again it is not our decision.

Uh-huh. Okay. Great. Good luck.

If I may?

Yes, please.

On Bebe, so if people want to know about Bebe, we are ( indiscernible ) international distributors, and -- and the duty-free partners the Bebe concept, it's quite interesting especially in certain countries like the Middle East and Central and South America, so we are going, we have decided to launch simultaneously international and domestic markets for Bebe.

Oh, that's good.

So in July, yes, so around July, 2009, we will ship more in the US and (inaudible).

Excellent, great. Good luck you guys.

Thank you. I answered a question you didn't ask.

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

Thanks, good morning, guys. In terms of the trends you have seen thus far, in October and, I guess, the early part of November, have they changed dramatically since September, or are you still seeing some growth in developed countries being exacerbated by faster growth in the developing world ?

Russ, you want to -- I will give my answer.

I think that the trends that we have seen for the first nine months are really continuing as we go in to the fourth quarter. Areas like Eastern Europe, Asia, and even South America, we still see some solid growth opportunities while there continues to be a weakness in Western Europe and in the -- and in the United States, I don't think that that has changed all of a sudden, effective October 1. I think -- I think it's going to be probably continue as we move through the fourth quarter, and maybe even on in to 2009.

Okay.

Yeah, we are not expecting a -- a strong Christmas sell-through in Western Europe, basically Germany, France, UK.

Uh-huh

And Spain, of course.

I'm sorry, you are not expecting strong sell through?

We are not expecting strong sell-through. That's why -- I mean, we have shipped -- any way, we have shipped an adequate level of inventory to our world distributors who have also shipped an adequate level of inventory to the stores. There is not a lot of inventory out there. We expected that in -- especially in Western Europe and the US, the market would be a little --

Difficult.

-- difficult. So it's not a surprise for us.

Okay. But nothing has changed dramatically, the first five weeks of this quarter, it sounds like.

No nothing other than the exchange rate of the dollar against the Euro.

Absolutely. Okay. Then in terms of the different price points that you guys sell at, are you seeing any major difference in trends there. Are consumers buying less expensive fragrances for example?

No, I would say that we have, like we said before, our strength is a little bit across the board and the weakness is a little bit across the board. We cannot say that some price points are more with (inaudible) and again, we have to (inaudible) mass market division.

Right.

But everybody is all of the price points are affected or --

Uh-huh. Okay. And then lastly in terms of your guidance, particularly on the top line, it would imply a sales decline in the fourth quarter and I think given where the dollar is at, it's not terribly unrealistic, but it sounds like you guys are expecting to see local currency growth even in the fourth quarter?

From a local currency standpoint, that's -- that's correct. But, again, we are -- we are very cautious, and we are watching the effect of the dollar and where it is going to go, and as I said before, at -- at the present time, we're fine, but it's something-- if the dollar continues to strengthen against the Euro, we're going to have to adjust as we see fit.

Got it. Okay. Lastly if I could in terms of the guidance for the tax rate for the fourth quarter, anything unusual there or should we expect something similar to what you've done in the first nine months-- the first six months of the year, I should say?

Well, clearly the -- the -- the situation with respect to the 700,000 benefit from the (inaudible) is a one-time deal.

Okay.

I would assume we would get back to a more normalized tax rate as we move in to the fourth quarter, and what -- keep in mind that, for the first nine months we're right at about 34% which is equal to the same 33, 34% that we had last year. Anywhere between that 34, 35% is our normalized tax rate, so that's kind of where I'm expecting to be at year end.

Got it. Okay. Thanks a lot, guys.

Thank you, Joe.

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

Hi, Ross, hi Jean.

Good morning.

Most of my questions have been answered, but just wanted to get reassurance regarding inventory in the channel. Jean mentioned that you are not assuming strong sell-through in Western Europe or the United States in the fourth quarter, do you think that your factory orders in preparation for the holiday season are in alignment with that assumption?

Thank you for asking me these questions because I want to be more precise, and I don't want to be misleading. We don't ship a tremendous amount of goods to our distributor, and our distributor will not ship a tremendous amount of goods for Christmas to their stores.

Okay.

So what I meant is we -- we expected to have a weak Christmas, and we built our inventory, and we built our fill in to -- for that. Is this clearer?

Yes, that's perfect.

Thank you very much for asking this question.

Sure. And then the last question I had, the higher interest expense in the third quarter to what should I attribute that?

That's for Russ.

Well, there's a couple of things. If you remember, somebody asked the question about the interest rate at the end of the second quarter, when we had a several hundred thousand dollars gain on the fair value of a swap. Clearly, that reversed in the third quarter, and that's what caused the third quarter to be a little bit higher than normal, plus our debt levels as you can see from the balance sheet at the end of the third quarter, was a little higher than normal, because of the utilization of cash for operating activities. So I would expect that the interest rates will be lower as we move in to the fourth quarter.

Okay. That make sense. That's all I have, thank you.

Thank you, Mimi

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

Good morning. With regards to promotion advertising, I know it was higher earlier in the year and has come down, but just looking for -- now that Bebe and Brooks Brothers are going to comprise a greater percentage of the total, should we look for that 16% of sales to come down over the next several quarters? Especially retail?

No, I think when you factor in Bebe and Brooks Brothers and the volume of sales that they represent as compared to a Burberry, Van Cleef & Arpels, Lanvin and all of our -- keep in mind that 80, almost 90% of our sales are the prestige brands. So that 16% that we have in promotion advertising for those prestige, for our overall blend will probably hold true.

Okay.

I -- I don't think you going to suddenly see some sort of an increase because there are some additional sales of Gap or Banana, Bebe, Brooks Brothers on an international basis.

Thanks, Russ. Everything else has been answered.

Okay. Thank you, Rommel.

Thank you, Rommel.

(OPERATOR INSTRUCTIONS). Your next question comes from the line of [Eric Raphael] of Merrill Lynch.

Hello?

How are you?

Good morning, Eric.

Good morning. You know, hold on -- am I coming through, guys?

Yes.

All right. Sorry about that, so I'm not so good on tax accounting, and so my question is why valuation allowances were needed when Inter Parfums generates strong consistent earnings in earnings growth more so than most any other company I follow actually. Is that because the income off setting and carry forwards must come from the same business source, the European distribution subsidiaries.

Well. there's two factors here. When it comes to the European distribution subsidiaries, because they are newly formed entities, they don't have a history of profitability. Right all right?

Right.

And therefore, because there's no history of profitability, if there are losses in those operations, keep in mind those are in different countries, if there are losses in those operations, there's no guarantee that those losses will ever be used.

Right.

Right.

Right?

So therefore we have valuation allowances on the tax benefits of those losses.

Great. Thanks for clearing that up, and congratulations as usual. Not an easy environment. To performance in and that's for sure.

Thank you Eric.

Bye.

Your next question is a followup from the line of Linda Bolton-Weiser of Caris.

This is a longer term question about the Burberry franchise. I think the last couple of major launches had more than a year in between the launches, do you think you are going to have to start narrowing the time in between major launches to continue to grow that franchise?

Well, I'll start, and then Jean, you want to --

Yeah, I would like to say that one year is usually a good -- a good gap, a good timing for (inaudible). We launched the woman's first, the men's after.. I think that some years ago, maybe three, four, five years ago, we could have -- we -- we would have preferred to wait 18 months between two launches, but the acceleration of launches is a reality in the industry, so we will stick to -- could be 12, 13, 14, 15 months for the new launches of Burberry. Same thing for Lanvin, same thing for (inaudible) Russ?

Yeah, I think that Linda is on point, that years ago we used to launch a new family for each brand between two years, sometimes going even as far as three years, and now it's more the one to two years, as opposed to the three, so I think there is an acceleration, and I think that that's pervasive in the industry, as Jean said. Okay?

Thank you.

Thank you. Is there one -- one more question or not, operator?

There are no further questions. I will turn the call back to you for closing.

Okay. Thank you very much. Again, thank you, everybody for your participation on this call, whether you are live on the call or listening via our webcast. If anybody does have additional questions, as usual, I am available by phone. Thank you 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.