Interparfums Inc (IPAR) 2009 Q2 法說會逐字稿

Good day, everyone, and welcome to the Inter Parfums second 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 would now like to turn the conference over to Mr. Greenberg. Please go ahead, sir.

Good morning, and welcome to our 2009 second quarter conference call.

If you have not received a copy of the press release we issued yesterday afternoon, please contact Linda Latman of The Equity Group at 212-836-9609, and she will fax or e-mail a copy to you. Before proceeding further, I want to again 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 heading 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 business is 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 second quarter 2009 results compared to last year's second quarter are as follows. Net sales declined to $88.6 million or 10.6% from $99.1 million. At comparable foreign currency exchange rates, net sales declined 3% for the period. Sales by European-based operations declined 5% to $79.4 million from $83.9 million. Sales by US-based operations declined 39% to $9.2 million from $15.2 million. Gross margin for both periods was 57%. Selling, general and administrative expenses as a percentage of sales declined to 49% as compared to 50% for the 2008 second quarter. Operating margins rose to 7.7% of sales from 6.9%. Net income attributable to Inter Parfums, Inc. rose 12% to $4.2 million from $3.8 million and diluted earnings per share attributable to Inter Parfums, Inc. common shareholders was $0.14 as compared to $0.12. Through the first half of 2009, net sales were $179 million, or 19.4% below the $222.2 million reported in the first half of 2008. At comparable foreign currency exchange rates, net sales were down 13%. Net income attributable to Inter Parfums, Inc. decreased 23% to $9.7 million, or $0.32 per diluted share from $12.5 million, or $0.40 per diluted share in the first half of 2008. To summarize factors relating to the comparable quarter sales decline were the strength of the US dollar relative to the Euro had the net effect of depressing 2009 second quarter sales by about 6.5% as compared to last year.

Last year's second quarter included the continuation of the roll-out of Burberry The Beat for women, which was our largest launch for our largest brand. Strong sales by our US operations in last year's second quarter included the initial international distribution of Gap and Banana Republic brand products and, of course, the effects of the recession and the global economic crisis. With regard to gross margin, the factors that were in play in the first quarter continued into the second quarter. Since European-based product sales to US customers are denominated in dollars while costs are incurred in Euro, as a result of the stronger dollar in this year's second quarter as compared to last year's second quarter, one would expect an increase in the gross margin percentage. Once again, however, that gross margin benefit was offset by varying sales mix within individual product lines, which resulted in a flat margin percentage for the 2009 and 2008 periods. As we have previously stated, we have adjusted our promotion and advertising budgets for the lower sales levels that we have forecasted for the year.

For the current second quarter, promotion and advertising included in selling, general and administrative expenses, aggregated $15 million or 16.6% of net sales, compared to $18.5 million or 18.7% of sales in the same period last year. Some of you may recall that advertising expenditures in the second quarter of 2008 were unusually high in support of the launch of Burberry The Beat for women. Royalty expense included in selling, general and administrative expenses aggregated $7.9 million for both the current and prior year's second quarter. Finally, as we reported yesterday, in the fourth quarter of 2008, we entered into foreign currency forward exchange contracts to hedge approximately 80% of our 2009 sales expected to be invoiced in US dollars. As a result of these hedging activities, for the current three and six months ended June 30th, 2009, we recorded foreign currency gains of $2.5 million and $3.9 million, respectively, which contributed $1.2 million and $1.9 million to net income attributable to Inter Parfums, Inc. for the current three and six month periods, respectively. We continue to maintain a strong financial position. At June 30th, 2009, working capital aggregated $182 million and we had a working capital ratio of better than 2.8 to 1.

At mid-year, cash and cash equivalents aggregated to $34 million after using $3 million in cash for investing activities, primarily for equipment purchases, and $15.1 million for financing activities, including $10.8 million in debt repayments, $3.7 million in dividends, and over $600,000 for stock repurchases. Finally, as we reported, we look forward to a stronger second half. For the year as a whole, our guidance remains unchanged with net sales of $390 million and net income attributable to Inter Parfums, Inc. of approximately $21 million or $0.70 per diluted share. As always, our 2009 guidance assumes the dollar remains at current levels. Just one housekeeping note, as some of you may have noticed, we have removed Christian Lacroix from our list of licensed brands in our business description. As by mutual agreement, this license agreement ends in December. We made this decision in order to keep the focus of our larger names with the greatest upside potential.

Jean, please continue.

Thank you, Russ, and good morning everyone.

We appreciate your participation on today's conference call. I think our second quarter sales were rather respectable in light of the factors Russ raised earlier. Furthermore, as we announced on July 23, our second largest brand, Lanvin, is doing very well, with sales increasing 25% in local currency over the first half of last year. You may also be interested to know that while business is weak in North and South America, certain territories continue to perform at satisfactory levels, notably Western Europe, Asia, and the Middle East. Moving on to new products introductions, just last week we, along with bebe's CEO and senior staff, hosted a press launch at our offices for the new bebe signature fragrance, which will debut at more than 212 bebe stores during the third week in August. Our goal was to develop a fragrance and packaging that evokes a sense of bebe and the bebe customer, a woman between the ages of 18 to 34, with hip, cool and sexy. We hope you will visit a bebe store and see if you think we hit the mark.

Next month, the scent debuts at 300-plus Dillard's stores, print advertising program with scent strips will appear in the November issues of Cosmopolitan, Elle and In Style Magazine and plans are moving forward with outdoor advertising on billboard and bus kiosks. Dealers have also made a strong commitment to the bebe launch as a featured fragrance in its multi-page advertising insert in several Conde Nast publications, plus inclusion in its holiday catalog. We anticipate that international distribution will begin late in the third quarter with a roll-out to 40 countries by year-end 2010 for bebe. The bebe business plan further builds upon our specialty formula. The unique twist is that we are selling the bebe fragrance to dealers, US department stores, for which bebe earns royalties, just as it will for international sales. In comparison, our other specialty retail products are only sold domestically at the brand's retail stores. We have also two new fragrances under the Banana Republic brand called Republic of Women and Republic of Men, which are coming to market in the third quarter. Also, Brooks Brothers Black Fleece is debuting this fall. Finally, we are working on a new fragrance for New York & Company that will be in stores later this year.

For Gap, following the April North American launch of the fragrance called Close, the new Gap fragrance, we are moving forward with international distribution during the second half of this year. We anticipate that these new product launches, together with existing distribution, we can look forward to better comparable quarterly sales trends in the second half of 2009 for our US-based operations. With regard to European-based operations, we have Van Cleef & Arpels Collection Extraordinaire coming to market in September, reaching 1,000 doors worldwide, including 50 Van Cleef & Arpels stores. The collection includes five women's fragrance and one unisex cologne. We also have a new men's scent, Paul Smith's Man, debuting in the third quarter. Our initial plans for 2010 are moving forward with a lineup that includes a sports fragrance for men and women and a cosmetics line under the Burberry brand. And for Lanvin, Van Cleef, and Paul Smith, we are creating a new women's scent for each. With seven months down and five more to go, our expectations for a challenging 2009 have come to pass. While we have taken appropriate defensive measures during this economic downturn, we have set our sights on the long-term growth opportunities in front of us. Beat from brand extensions like the cosmetic line from Burberry or by opening new doors for existing brands and products, as well as by exploring and evaluating additional prestige and specialty brands that might be suitable additions to our portfolio.

At Inter Parfums, some things don't change; namely, a strong balance sheet, which has allowed us to endure economic downturns and thrive during periods of economic growth. Before taking your questions, let me share with you some of our upcoming investor activities. At Inter Parfums, we will be presenting the CL King Best Ideas Conference on September 17th in New York and Wedbush Morgan's California Dreamin' Conference in Santa Monica on December 9.

Operator, we can open the floor for questions.

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

Good morning, guys. Just a couple quick ones. First, in terms of the inventory levels you're seeing with your retail partners and distributors, is there a chance that those levels are relatively low at this point, we could see a sort of rebuild in inventories in the back half of this year and is that assumed in your guidance?

I'll start if you want, Jean.

What I can say regarding the inventory of our warehouse distributors, I think that at the end of the second quarter, actually maybe in May, starting in May, we have seen the lowest point of our inventory. It means they will have to rebuild some inventory -- a lot of inventory, I will say, towards the second half of the year. I'm talking about international distributors. Yes, Russ?

Yes, I tend to agree exactly. I think not only international distributors, but also with respect to the retailers. Inventory levels are -- have reached a low and we are starting to see some rebuild. To the exact extent that distributors and retailers are going to load up with inventory, that's a little too early to tell, but there's certainly a -- we have, I believe, reached that low point.

And that's reflected in your guidance?

As far as sales -- as far as our sales go, yes, all of this -- all of our thought process with respect to what's happening at retail and at distributor level is built into our guidance.

Okay. And then secondly, the Lanvin brand, obviously, has been a bit of a standout here. Can you give us a sense of what's driving sales at that brand?

I think that the name recognition of Lanvin, especially in Western Europe, is stronger and stronger and the quality of the last launch was above our expectations. I think that Lanvin has the potential to be really our second -- it is today, and it will continue to be our second largest brand in the portfolio. We have a lot of growth potential.

Yes. The only thing I'll add there is Lanvin has really been a -- the brand itself an opportunity for Inter -- it's created an opportunity for Inter Parfums. It's one of the few brands that we actually own the trademarks and by buying those trademarks, what we've done is we've put cash into the coffers of Lanvin Corporate, who has been using that to help build the recognition of the Lanvin brand in certain countries around the world and that has certainly helped us, as well.

Okay. And one last one for you, Russ, on the modeling side. The currency hedges, the gains year-to-date are about $0.06. What are you expecting this year in terms of what's baked into your guidance and would you expect any additional gains next year, assuming currency rates stay where they're at.

Well, you know as well as I do, it's almost impossible to determine and to forecast what's going to happen with exchange rates. Clearly, the gains that we've reported in the first six months are certainly higher than what we would have anticipated. We're taking a relatively conservative approach going forward. We think that some of it may even reverse in the second and third -- in the third and fourth quarter. All of that is included in the guidance that we've issued.

Okay. So, you're not assuming an additional $0.06 in the back half of the year?

No, that would be foolish.

Okay. Perfect. Thank you.

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

Hi, Jean. Hi, Russ. Good morning.

Good morning.

Good morning.

Russ, first, in the past in your Qs, I think you've disclosed what the cost of -- or the fees you've had to pay in association with the distribution joint ventures have been. Did you -- was that purposefully excluded in this latest Q? Is there a change in policy?

No, I just -- in evaluating it, it really didn't seem all that significant. Because I did not specifically disclose it, I would rather review it internally and see if it's material before I throw numbers out on the conference call.

Fair enough.

If you don't mind.

No. And then following up on a question that Joe had asked, supposing that retailers are caught somewhat unawares and require a lot of inventory in a short span of time, either ahead of or during the holiday season, how does the need for expedited orders affect your business model? Is it possible that we could see some margin deterioration as a result of the fulfillment required?

No, I think, albeit we have been able to bring our inventory levels down quarter after quarter, inventory levels are still a little on the higher side.

Okay.

And we've done that and we've built in anticipation of the new launches that we have, and in anticipation of retail changing direction and actually building up some inventory. So, I think we're in pretty decent shape to provide and to supply our customers with whatever needs may be.

Okay.

All that will do is it will help determine how low we can bring inventories down at the end of the year.

Okay. I also wanted to ask -- this might be a better question for Jean -- how the landscape or the market looks for trademark acquisitions, potential new license agreements?

It's interesting because we have been, as we mentioned in the last conference calls and in the last press releases, we are actively looking to extend the portfolio. We are talking to some very interesting owners of trademarks and we hope that before year end, we will be able to land one or maybe two new license, even though, of course, there are no guarantees. But I think the scope -- the landscape has opened a little bit because the market is a little bit more difficult and we've seen some license who has not been very happy with their business with certain licensee and looking also to switch their business and they are open to talk to other companies. This is for license for retail partners and because of the success that we have shown with Gap and Banana Republic, of course, we are trying to leverage this and we are talking to new -- to American retailers who I think will be looking very carefully at what we are doing with bebe, because with bebe, not only as we said we are going to launch it at their bebe stores, but for the first time, we are opening to third party distribution, and we have now this agreement with Dillard's who is going to push bebe in their 300 doors and we think that we can in the future see more of this type of arrangements.

Okay. Okay. And then, somewhat related, the last question I have is in the specialty retail business and the fairly significant decline in the latest quarter. Is there anything beyond just weak market conditions that would shake your confidence in the actual business model?

Well, we're very confident in the business model and the numbers do not reflect the reality. I think that last year, we had the bi-plan of international distribution that we didn't have this year and I will say that because of timing of launches, the bebe launch really happened at the beginning of the third quarter, and so it was not captured in the sales of the second quarter, but we are pretty optimistic, especially when we look at the sales -- the sales and the retail atmosphere for the last 30 or even 60 days, we are pretty optimistic for the end of the year.

Does that mean you've seen an improving trend in the last couple months?

Yes, I've seen an improving trend, definitely, both domestically and internationally.

Okay. Sounds good. Thank you.

Absolutely.

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

Yes, good morning. Last couple of quarters, you've noted that promo and advertising expense has come down on a year-over-year basis, but given the launches in the back half of the year, is that something you would expect to see in the back half of the year, sort of down promo and advertising expense?

I think the back half of the year is going to be fairly consistent with the first half as far as the percentage of sales overall. Keep in mind, we did launch Burberry The Beat for men, so there was some advertising, some significant spending in relation to that. The other thing, too, is we're getting a little bit more bang for the buck because advertising rates pretty much around the world have come down. So, part of the difference is not so much in less ad pages, it's actually lower costs involved. But I would imagine second half of the year if we were at 16.5%, almost 17% for the first half, we'll probably be somewhere right around the same for the second half.

Perfect. Thank you, Russ.

You got it, Rommel.

(Operator Instructions) Your next question comes from the line Neely Tamminga with Piper Jeffrey.

Actually, it's Maria for Neely. My first question, Jean, you kind of touched on this a little bit about the Dillard's and bebe partnership, but I'm just wondering, could you roll this out with additional or your other specialty brands such as Brooks Brothers, Gap or any of those in other department stores?

It's not in our immediate plans. We think that we will test this with new -- with other brands that we may sign in the near future.

And the bebe fragrance could go beyond Dillard's; is that correct?

Absolutely. Bebe fragrance will be sold at dealers during, I will say, at least six months from today, but after the six months, we will definitely look at opening more doors for bebe in the US.

Great. Thank you. And then, could you also talk a little bit about the Gap fragrance line, (inaudible) Sephora ,

It's very interesting. We've been working with Sephora at their headquarters in Paris to organize the launch of Gap Close in all their doors in Europe and the Middle East and far east also. So it will be -- we will be well represented in their stores. We will -- they will do some special signage in their stores for the launch of Gap. Don't forget that the image of Gap outside of the US is very strong and it represents -- it's an iconic brand, it's an iconic American brand in Europe and in the Middle East and far east, so we will play a lot on that for the launch of Close and Sephora .

Okay. There are no further questions at this time. I'll now turn the conference back over to management.

Thank you. Again, thank you for your participation on this conference call, whether you are on the call live or listening via our webcast. As usual, if anybody comes up with additional questions, I make myself available by phone. Thank you for joining us 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.