Interparfums Inc (IPAR) 2009 Q1 法說會逐字稿

Good day, everyone, and welcome to Inter Parfums first quarter 2009 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 Mr. Russell Greenberg, Executive Vice President and CFO. Please go ahead, sir.

Thank you. Good morning, and welcome to our 2009 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' annual report on Form 10-K 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.

As we reported yesterday, our first quarter 2009 compared to last year's first quarter was as follows. Net sales declined 27% to $90.4 million from $123.2 million. At comparable foreign currency exchange rates, net sales were down 21% for the period.

Sales by European based operations declined to $82 million, down 26% from $110.6 million. Sales by US based operations declined to $8.4 million, from $12.6 million. Gross margin was 59% compared to 60%.

Selling, general and administrative expenses as a percentage of sales was 48% compared to 45%. Operating margins were 11.4% of sales compared to 15.5%. And net income declined 35% to $7.3 million from $11.1 million, and diluted earnings per share were $0.18 compared to $0.28.

There is not much more to add to our first quarter sales discussion that wasn't already included in our last two releases. To summarize factors into the comparable quarterly sales decline were as follows. The strength of the US dollar relative to the Euro had the net effect of depressing 2009 first quarter sales by about 6%, as compared to last year. Last year's first quarter launch of Burberry the Beat for women was our largest ever launch for our largest brand.

Exceptionally strong sales by our US operations in last year's first quarter, and last but not least the effects of the recession and the global economic crisis.

With regard to gross margin, since European based product sales to US customers are denominated in dollars, while costs are incurred in Euro, one would expect an increase in the gross margin percentage. However, the gross margin benefits were offset by sales mix issues within individual product lines, causing the slight decline in gross margin percentage.

With respect to operating margins, as many of you will recall, we shipped most of the sales associated with the global launch of Burberry the Beat for women in the first quarter of 2008, but the advertising expenditures associated with the launch were predominantly incurred in the second quarter of 2008, which obviously enhanced last year's first quarter's operating results and diminished last year's second quarter results.

Promotion and advertising included in selling and general administrative expenses aggregated approximately $13 million, or 14.4% of net sales in the current first quarter, compared to $16.6 million or 13.5% of net sales in the same period last year. Royalty expense included in selling, general and administrative expenses aggregated $8.5 million or 9.4% of net sales in the current first quarter, versus $12.2 million or 9.9% of net sales for the three months ended March 31, 2008.

As the reduction in promotion and advertising expenditures indicate, we are managing Inter Parfums for our recession adjusted near term expectations. That also includes inventories, which at the close of the first quarter were $121.2 million, down from $123.6 million at year end, as both distributors and retailers are also carrying less inventory.

We've also maintained a strong financial position. At March 31, 2009, working capital aggregated $164 million, and we had a working capital ratio of 2.5 to 1. Cash and cash equivalents aggregated $34 million, and that's after using $1.7 million in cash for investing activities, which includes $1.4 million for equipment and tooling purchases, and using $6.7 million for financing activity, which includes $5.4 million in debt repayments.

Finally, there has been no change in our expectations for the year as a whole, which our guidance calls for net sales of $390 million, net income of approximately $21 million, or $0.70 per diluted share. As always, our 2009 guidance assumes the dollar remains at current levels.

I now turn the call over to Jean Madar, our Chairman of the Board and Chief Executive Officer. Jean?

Thank you, Russ, and good morning, everyone. We appreciate your participation on today's conference call.

During the first quarter, Burberry brand sales were quite respectable, considering the surge in last year's first quarter in connection with the global launch of Burberry the Beat for women. Following limited distribution at Bloomingdale's in the fourth quarter of last year, Burberry the Beat for men rolled out globally, and we have been quite satisfied with its performance, especially in this difficult economic environment. Both the women and men's versions of Beat fragrances are final list for the fragrance foundation, Fifi World, which will be announced on May 27.

We've got the number one men's tennis player, Raphael Nadal, featured in our print advertising for Lanvin L€™Homme Sport, which also debuted in the first quarter in European markets. This new launch, together with reorders of (inaudible) Lanvin fragrance launched in 2008, enabled us to generate $11.4 million in Lanvin sales in this year's first quarter, practically unchanged from first quarter of last year.

Regarding Quicksilver. The Quicksilver men's signature fragrance is now rolling out in select markets, and as we reported, for 2009 our new product launch schedule includes a new Paul Smith fragrance for men later this year, where we will also unveil a limited edition, high end women's fragrance for Van Cleef & Arpels called Collection Extraordinaire. And we will introduce that in the second half of 2009.

Looking further ahead, we are looking in our 2010 lineup, and while not etched in stone, we wanted to share some of our preliminary plans. For Burberry brand, we are developing a sports fragrance and a full line of color cosmetics, and for Lanvin, Van Cleef and Paul Smith, we are creating a new women's scent for each.

Moving on to the US operations. The current economic downturn has not diminished our enthusiasm for our specialty retail business model. The combination of direct sales to North American stores, plus the licensing component for international distribution is working well for Gap and Banana Republic products, and while (inaudible) our other brands, specifically Brooks Brothers and Bebe, onto the template.

For example, Brooks Brothers New York, a fragrance collection for men and women that was launched in the US Brooks Brothers location in November 2008, began its global roll-out this spring. I might also add that both men's and women's Brooks Brothers fragrances are Fifi World finalists.

With regard to new products, late last month, Close, a new fragrance developed for the Gap, debuted at Gap and Gap Body stores in North America. In July, the international roll-out begins, and by fall this new women's fragrance should reach approximately 5,000 doors.

For the Banana Republic brand, we have a new men's and women's fragrance scheduled for launch in August. In the fall, the Brooks Brothers Black Fleece collection for men and women are being unveiled at Brooks Brothers stores domestically, to be followed in 2010 with international roll-out.

I should also add that the Brooks Brothers legacy men's fragrance, for which we designed a new bottle and package, is also a finalist for the fragrance Hall of Fame category.

Come August, the first major product line under the Bebe brand, new signature fragrance launches in Bebe Company stores. We have fast tracked worldwide distribution for later this year. And although we discontinued the Bath and Body line that we introduced at New York and Company, we have been very successful with our cosmetics program with lip gloss and color kits, and for the fall of 2009 we plan on launching a New York and Company signature scent.

The take away point of this specialty retail discussion are that we have a (inaudible) business model It is working across a wide spectrum of brands and brand associations, and we have been able to accelerate the process from initial signing to global distribution to just about one year.

We are in discussions with the management of other specialty retail organizations, and are hopeful that due to our reputation and track record, additional agreements will be signed, so that we may leverage our organization and talent pool. Of course, we cannot assure you that any new agreements will be signed.

As we stated in our year end conference call, we expect 2009 to be a challenging year, but we are prepared and we are managing Inter Parfums for both the near term economic realities, as well as for the long-term business opportunities ahead of us. We have a high quality portfolio of premium brands and a strong balance sheet which, along with our flexible and productive business model, have enabled Inter Parfums to withstand weak economic conditions before, and should enable us to again grow sales and profit once the economy turns.

Before taking your questions, let me share with you some of our upcoming investor activities. Inter Parfums will be presenting at the Piper Jaffray consumer conference on June 10, in New York. And the Oppenheimer consumer conference, which takes place on July 14 and 15, in Boston. And CL King Best Ideas Conference on September 16 and 17, in New York.

So now, Operator, we can open the floor for questions.

Thank you. (Operator Instructions). Your first question comes from the line of Joe Altobello of Oppenheimer.

Good morning. First question is on the Burberry color cosmetics line. Where do you guys expect to be selling that, and which channels in particular?

The Burberry cosmetic line has been a work in progress for the last, at least two years. We took our time because we have some experience about color cosmetics. I remind you that we did it for (inaudible). So we tried to not make the same mistakes. And so from a distribution point of view, we have decided to select one store per country, so it's going to be a very limited distribution.

The whole idea is to be in the first year in 40 to 50 doors worldwide, maybe just in the US we'll have three doors instead of one, but in France we'll have one, in Italy, one, Germany, one, et cetera. It's a very, very -- and of course it will be sold in all the Burberry stores.

The idea for the cosmetic line is, number one, to test the water for color cosmetics because we think that Burberry has a real legitimacy, and number two, to gain space in department store via a counter. So this is a very thorough and well-studied project.

The goal is for the first year to break even, which is difficult in this market. But we have -- we know the different parameters, what the cost of goods should be, how much we should spend for the counter, how much we should spend for the girls behind the counter, so we have a pretty good idea of what we are doing.

Okay, so it sounds like it's going to be relatively slow in terms of the pace of the launch?

It is. First, it's small for image, and then of course if it sells through there and if the model works, which we expect, we will roll out and open more doors.

Okay.

There are other companies who have followed this type of distribution, Georgio Armani did it very successfully. We want to follow his path.

Okay, and just a couple for Russ, if I could. First, the gross margin down due to product mix, could you elaborate a little bit on that? Secondly, the guidance you gave today obviously is unchanged. Is it also unchanged for (inaudible), are you still expecting 273 million Euros there, despite the fact that sales were down pretty meaningfully in the first quarter?

First, with respect to the gross margin and the product mix, the main part of the product mix allocation is really the fact of the initial launch for Burberry the Beat for women in the first quarter of 2008. With pipeline and Burberry is one of the brands in our portfolio that we do generate one of the higher margins. So the decline of Burberry sales is -- I guess is most attributable to the gross margin product mix decline.

With respect to the guidance issued, the last sales report that we issued out of Paris did not discuss any changes in connection with their guidance, so I'm going to bow out to actual press releases that are issued by Paris with respect to their sales data or to the sales data of the European unit. As far as I know, they have not changed any of their initial guidance from the beginning of the year.

Okay. So just going back to the gross margin question for a second.

Yes.

It sounds like there was a lot of Burberry sales in the year-ago period, which you knew about. So I'm curious why you were surprised that gross margin was down in this period.

I'm sorry. You're coming in very low. I didn't hear that.

I'm sorry. The mix, it sounds like, was due to the fact that you had a lot of Burberry sales in the year-ago period, which you knew about, so I'm curious why you were surprised that the gross margin was down in this quarter.

It's not a question that I was surprised. It was more of a question that -- I mean, we don't give guidance on gross margin. I'm just trying to explain that what one would normally expect in a period where the dollar has strengthened against the Euro, we've always come out and indicated that that should help our gross margin percentage.

So it's not a question that we were surprised of anything. I'm really more just stating the facts.

Okay. Because it sounded like in your press release that you were surprised.

I used the words, one would expect.

Got it. Okay.

All right? It's not a question that we were surprised at all.

Okay.

Okay?

Got it. Thank you.

Thanks, Joe.

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

Hi. I guess there was always the belief out there on the Burberry the Beat for men that it actually would be the same or even bigger than the women's launch, because it's a men's brand, kind of. Was it really different than what you expected, or is it that some of the older Burberry brands are kind of declining more? Can you just explain a little bit more the Burberry decline, because I think it was about 20% decline in the quarter, right, for Burberry.

I was just going to give the details on the decline for Burberry. In absolute dollars, Burberry was down approximately 29%. In constant dollars, it was down approximately 23%, which is somewhat consistent with the overall decline of 21%. Jean, do you want to discuss the -- ?

Yes, I want to say that when we launched the women's line last year, the economic situation was different. The launch of Burberry men is right on the -- at our expectation, and that's true with the timing of the launch was really not as good as the women's launch, due to the fact that there is a drastic reduction of inventory at distributor level and at store level, so we are not in the same economic conditions.

Right. And Proctor & Gamble did talk about the prestige fragrance area on their earnings conference call, and they actually said that that was one of the areas that they felt that the inventory reductions at retail were not over with yet. Whereas in many other areas, maybe they're over with. So can you comment on that?

And I mean, if they're saying that, certainly that's going to be the case for your sales performance in the second quarter as well. It's going to be quite weak, won't it?

With respect to P and G, and when you're talking here in the United States, I agree. I think you're right. I think that there is still -- they use this word, destocking. I'm not crazy about the word, but that's kind of an industry-coined term. And I think that in the US, sales in the second quarter will be lower than in comparable periods, and I don't think we've seen the end of it.

But this is really -- I don't even want to say a continent by continent, because it's more of a country by country phenomenon. There are certain countries that are still doing relatively well, and then there are other countries that are not doing well at all. So we're looking at our brands and our sales on a global basis, and P and G's comments are more with respect to -- I believe with respect to the United States markets.

Do you think the inventory destock issue is a little less severe in Europe?

I think in certain parts of Europe.

Yes, in certain parts of Europe I would tend to agree, but it's true we are not seeing -- it has not stopped. I mean the month of April was good, but we are a little bit different than P and G in the sense that we use a lot of distributors, where P and G has their own subsidiary selling directly to the market. So first we -- our distributors see the destocking at retail level, and then of course they buy less from us.

But as Russ said, it's not every country is doing the same. We are doing still well in China. We are doing very well in the Middle East. There are certain countries in Europe that are doing better than others. So we have some mixed signals.

Okay. And then -- so is the phenomenon going to be the same with the advertising for the Burberry for men, that it's going to be more heavily weighted in the second quarter, similar to the women's situation last year?

I don't think, because of the way the roll-out of the men's went, as Jean said, it wasn't quite as robust, if you will, as the women's. I don't think you're going to see a huge differential.

Last year was a very unusual period because the sales were -- in the first quarter were far greater than we really anticipated. All right? And that caused the phenomenon with respect to when the advertising was going. And keep in mind that once we saw how good the sales were and the sell-in for Burberry the Beat for women, to keep that momentum going, we knew we needed to put all the advertising efforts into that second quarter, second and third quarter, I should say.

Here, we're in a different economic situation. We are going to look at our sales. We are going to build our advertising and promotion budgets around the sales that we have.

We know we have to keep expenses under tight control because of the economic situation that we're in. Advertising and promotion expenses for us, when you include the amounts that are in costs of goods, are upwards of 25% of sales, so this is one of the variables that we have that we can push to maintain our profitability.

And I will add that we are committing advertising on a monthly basis right now. So we are not -- we are really adjusting higher or lower advertising based on sales.

Okay. And then I missed, when did you say the Burberry color line would launch?

2010.

Oh, --

2010 will be the launch.

Okay. Thanks.

Thank you, Linda.

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

Hi, good morning, it's actually Maria for Neely. I'm just wondering if you can talk a little bit about price points, and if you're seeing any divergence there, and then also relatedly, how are you thinking about price points for the fragrance launches that you have set--.

I can't hear you very well.

I'm sorry. I'm wondering if you can talk about price points, and how you're thinking about that for your specialty store fragrance launches, and then also if you're seeing any divergence in price points in general?

From a price point point of view, what we've seen in the first quarter really started in the fourth quarter. People are buying the smaller size, so definitely we see a lower ticket (inaudible) than higher ticket. This is a trend for everybody.

And from a divergent point of view, I don't know if I understand -- your question is, do we see a lot of diversion?

I think what they were getting at is, we haven't seen any changes particular in the actual selling prices or retail selling prices of perfumes. What Jean is getting at is that, people are trading down a little bit and buying smaller sizes as opposed to larger sizes.

The other thing that we're also seeing, especially we saw much more in the fourth quarter of 2008, is the value oriented purchases, the gift sets and gift with purchases and purchase with purchases. Those kind of promotions have been much more prevalent from the standpoint of providing value to the consumers.

The second part of the question I believe, and correct me if I'm wrong, is price points with respect to the specialty retail products. And those really have not changed at all either. Again, I think we see the same kind of a phenomenon with respect to people buying the 50-milliliter as opposed to the 100-milliliter but prices haven't actually changed.

We do not discount. We do not change any retail price point.

Got it. Thank you very much.

Thank you.

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

Hi, Russ. Hi, Jean.

Good morning.

Two questions from me. First one, get it out of the way, have you seen any significant decline in advertising rates? Is that an area where you could be saving some money, perhaps?

Absolutely.

Okay.

Absolutely. We are buying advertising at a lower price than last year, definitely.

Can you gauge what the order of magnitude is?

I would say an average of about 20%.

That's about what I thought. The other question I wanted to ask, and Jean you already touched on it a bit, but obviously the cosmetics counter is a different business model than fragrance is. I assume you'll have to take on new full-time employees for the young women that are behind the counter. Can you go over the nuances of the differences with this new business model, and why you feel better about the risks now than you did four, five years ago?

I think that Burberry is our only global brand, really. And we are coming out with this line of color cosmetics based on the demand that department stores are seeing. So we're able to negotiate great space because of the label of exclusivity that we are going to give to these retailers, and I think that when you take into account the cost of goods and the human --

The labor.

Put behind the counter, we can make this business a profitable business, but we want to do it at a slow pace. The idea is to create the buzz, having one store per country, (inaudible) in France, Harrod's in the UK. We are right now negotiating with one retailer in the US, et cetera.

Do you think you're getting involved in a more competitive category than fragrances?

It is more competitive. But I think that Burberry, the line of color cosmetics under the Burberry name has a real reason to exist, from a packaging point of view and from the quality of the products, the tests that we have conducted are showing some very positive results.

Russ, anything you would chime in there?

The only thing that I would add is, again, we're taking the experiences that we've gained in doing the line for Diane von Furstenberg several years ago, and there it was more of just a US based baseline. This is more of a global line because of the global reach of the Burberry brand.

What was the fatal flaw with Diane von Furstenberg?

Well, it is, as Jean mentioned, it's a completely different type of a P&L with respect to these counters, and the manufacturer's control over the counters or obligations to control the counters.

And that's one of the reasons that designers typically start the way we do on a very, very slow, controlled basis because if you just opened up 30, 40, 50 counters here in the United States, the costs of maintaining those counters are so high that you need a certain sales level in order to make them even close to breakeven. And it's very difficult to do that on a new product line.

Starting off slow, you're concentrating on the brand itself to drive the sales, and the costs are controlled because it's only one location. It's the destination if you want to try the Burberry cosmetics.

That's helpful. Thank you.

Thank you, Mimi.

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

Hi, yes, good morning, Jean and Russ. On the expenses, you guys addressed that you're looking to trim back the promotion and advertising expense in a tough economy. Can you talk about some of the other areas, like product development and G&A, other cost cutting initiatives that you're looking at there?

From a G&A standpoint, we really concentrated a little bit on our salary structure for the specialty retail business. Clearly, the domestic side of that specialty retail business has declined. US sales for the US division, again, were down 33% for this quarter.

So we have this infrastructure that we've built, and we've made some modifications in connection with that part of our business to, I guess the term would be right-size, the personnel associated with the revenues of that business.

On the international side of it, it has continued to grow, so we've actually moved some people from the domestic side to the international side to take advantage of those opportunities.

But other than that, when you look at our overall -- the biggest expense we have, or one of the biggest expenses we have is human resources. And the reality is is that when you compare the number of employees we have to our revenues, because of the fact that we don't own our own manufacturing facilities, it is relatively low.

So there's not a tremendous amount we can do there, so we kind of just look department by department and pick a few places where we thought we can actually trim a little bit. But other than that, there's really not much else you're going to be able to do other than of course try to keep a rein on all of your expenses, including the variable expenses as well.

Sure, and just a quick follow up, if I could, on the Burberry color cosmetics, I know, Russ, that you in the past, and Jean, you've talked about when you resigned the Burberry license a few years back, you had that right or the option to do cosmetics. Is there any sort of, and I know you can only talk so much about the contract, but is there any sort of minimum royalty or minimum advertising spend that you'll have to incur now that you're sort of adding on this new business, or is it just a straight royalty as a percentage?

The royalty rate and the required advertising for Burberry is based on the brand in total. When we signed the new license with Burberry in 2005, as part of the license negotiation, cosmetics were added as an additional line item of eligible products pursuant to the license. So it will fall into the same category, and we will pay the same royalty rate on cosmetics that we do for fragrance, and the required advertising spend is built into overall brand sales, so it doesn't matter whether it's cosmetic sales or fragrance sales.

Thanks, Russ, I appreciate it.

I hope that helped.

Yep.

Hello?

Yep, I'm all set, thanks very much.

Okay.

(Operator Instructions). Your next question comes from the line of Joe Altobello of Oppenheimer.

Hey, guys. Just a few follow-ups. First I guess for Russ, could you talk about how the proposed change in tax on foreign earnings is going to impact you guys? Second, if you use the current exchange rate, what would the gain on the currency hedge for the year be, roughly?

And then lastly, if I could, the inventory number down sequentially, which is very nice. I'm curious if you think that could be down year-over-year as we exit 2009?

Okay. First, we are evaluating what the potential effect of the administration's tax proposals could be. It's a little early to tell right at this time. Initial indication is I don't think it's going to affect us to any great extent, but until we have a chance to talk with all of our tax advisors in the United States and overseas, I think that question should probably wait for a later date when we have a better handle on it.

What was the second question?

The gain on the currency hedge, what are you expecting?

Most of the gains and losses in connection with the currency hedge that we did in the fourth quarter is -- are cash flow hedges, so what we've done is we've locked in a sale at a dollar rate of around $1.25, $1.26. The fluctuation that we've seen, or these numbers that last quarter was an $800,000 loss, this quarter was an $800,000 gain, this is part of the hedging instrument that is related to interest rates. That's really the best way to describe it.

And what's happened is that in the fourth quarter of 2008, the United States interest rates went down, where European interest rates were relatively unchanged. That caused a huge -- a fairly significant loss, if you will, on this foreign currency. And then in the first quarter, as Europe brought their interest rates down to almost levels equating to what the United States did, that reversed that.

Now, I have no way of knowing what's going to happen with interest rates in the future. But if European rates and US rates stay relatively close together, then we should not see this kind of volatility of this gain and loss on foreign currency that we've seen in the fourth quarter of 2008 and the first quarter of 2009.

The rest of the hedging positions are really to lock in our sales levels, all right, and to make sure that we know what level we're recording our sales are, so we can match that costs of goods against it. I hope that helped.

It did, and lastly, the inventory number, what would you expect?

Inventories are down a little bit this quarter compared to last quarter or to year end figures. I think it's pretty close to what we had predicted. The inventories are -- I think they're $2 million or $3 million higher than what they were in March of 2008. I would have liked to see them down a little bit more this particular quarter, but I think that with the sales levels the way they were, it was a little difficult to do that.

But we are watching inventories very carefully, as we're watching all of our dollars. I'm hoping to see inventory levels maintain at around this level through most of this year. Without huge launches going out in the remainder of 2009, there's a lot of launches but there's not -- and one or two that are global in nature, and without the global in nature type launches, I would hope that inventories will stay at around -- at steady levels.

Perfect. Okay. Thank you.

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

Okay. Thank you. Thank you all for your participation on this conference call, whether you are live on the call or listening via our Webcast. And as always, if anybody does have additional questions, I'm always available by phone. Thank you for joining us and have a great day. Bye.

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