Interparfums Inc (IPAR) 2009 Q3 法說會逐字稿

Good day, everyone, and welcome to the Inter Parfums third 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. Please go ahead, Mr. Greenberg.

Thank you. Good morning, and welcome to our 2009 third quarter conference call.

If you have not received a copy of the press release we issued yesterday afternoon, please contact Linda Latman of The Equity Group at 212-836-9609 and she will fax or e-mail a copy to you.

Before proceeding further I want to 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 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 a reminder, when we refer to our European based operations, we are primarily talking about sales of prestige fragrances which are primarily conducted out of France. When we discuss our United States operations, we are referring to the sales of specialty retail and mass market products.

We were very pleased by our third quarter financial performance, especially in light of the global recession and the ongoing credit crisis.

As we reported yesterday, our third quarter 2009 results compared to last year's third quarter are as follows. Net sales declined 5% to $117.5 million from $123.5 million. At comparable foreign currency exchange rates, net sales declined 6% for the period. Sales by European-based operations declined 4% to $104 million from $108.8 million. Sales by US-based operations declined 8% to $13.5 million from $14.7 million, a much reduced percentage decline compared to the first half of the year. Gross margin was 57% compared to 55%.

Selling, General and Administrative expenses as a percentage of sales were 45% for both periods. Operating margins rose to 11.8% of sales from 9.1%. Profitability set a third quarter record as operating income rose to $13.9 million, up 23% from $11.3 million. Net income attributable to Inter Parfums, Inc. rose 17% to $7.3 million from $6.2 million, and diluted earnings per share attributable to Inter Parfums, Inc. common shareholders was $0.24 compared to $0.20.

Through the first nine months of 2009, sales were $296.6 million, or 14% less than the $345.8 million reported through September 30, 2008. At comparable foreign currency exchange rates, net sales were down 11%. Net income attributable to Inter Parfums, Inc. decreased 9% to $16.9 million or $0.56 per diluted share from $18.7 million or $0.60 per diluted share in the first nine months of 2008.

Our third quarter gross margin as a percentage of sales includes a benefit of 193 basis points related to our cash flow hedging activity. We have also been able to maintain tight controls on SG&A which, as I mentioned, was 45% of sales for both periods. For the current third quarter, promotion and advertising included in SG&A expense aggregated $18.4 million down from $19.7 million in the prior year's third quarter. Royalty expense, included in SG&A, aggregated $10.1 million from $9.8 million in last year's third quarter, with the slight increase due to product sales mix.

Our bottom line also benefited from a pre-tax foreign currency gain of $900,000 for the third quarter relating to our hedging activity and from lower interest expense.

We've been able to further strengthen our financial position and liquidity. At September 30, 2009, working capital aggregated $195 million, and we had a working capital ratio of almost 2.9 to 1. As the third quarter closed, cash and cash equivalents aggregated $58 million long-term debt had declined to $20 million. As we mentioned in yesterday's news release, we were able to reduce inventories by 40% over the trailing 12 months, from $134.3 million at September 30, 2008, to $96 million one year later. This inventory reduction contributed to our nine-month 2009 net cash provided by operating activities of $33.6 million. This compares to a $41 million net cash use in operating activities through the first nine months of 2008.

The second half of the year, as we forecast, is shaping up to be much stronger than the first half. While it may be too soon to call it a recovery, we are seeing some positive trends, most notably, distributors and retailers are more willing to stock inventory, a welcome change from the destocking trend of the past several quarters.

We raised our 2009 guidance yesterday. We now expect sales to come in at approximately $400 million, resulting in net income attributable to Inter Parfums, Inc. of around $22.3 million or $0.74 per diluted share.

As always, our 2009 guidance assumes the dollar remains at the current levels. Jean, please continue.

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

Moving on to new product introduction, I'm delighted to report that the new bebe signature fragrance has been a huge success so far. In addition to better than expected reorders by bebe stores following the mid-August launch, in September we shipped more than 300 dealer stores and international distribution has begun and will continue next year, as our goal is to be in 40 countries by year-end 2010.

In October we have added nail color products to the bebe mix, which will be followed by eye shadows in December. The lip gloss color palette is being launched and updated for changing season. From our current vantage point, it looks like bebe is a real winner and next year we plan on bringing our second bebe fragrance to market, plus additional cosmetics products.

It bears repeating that the bebe business plan added a new dimension to our specialty retail model in that we are selling the bebe fragrance to dealers and US (inaudible) stores. As you know, our other specialty retail products are produced and sold by us exclusively at the France domestic retail stores and we generally use distributors to sell the products internationally.

We believe this new facet of our specialty retail formula may be applicable to other specialty retail partners. Other launches included in the US, Republic of Women and Republic of Men for Banana Republic, with international distribution in process. We launch also Close, a Gap fragrance that was launched in North America in the spring and is also currently being sold internationally.

Our group products we launched Black Fleece, Eau de Toilette for men and Eau de Parfum for women, in September and this is our second new fragrance (inaudible) for this brand. Like the Brooks Brothers Black Fleece clothing collection, the Black Fleece fragrance has a more upscale positioning and pricing than the (inaudible) brand. Black Fleece is being carried in 50 Brooks Brothers stores in the US, whereas our Brooks Brothers New York collection launched at 230 Brooks Brothers stores. International distribution also will begin next spring.

And from New York & Company, we have launched a fragrance that we shipped last week. It will be in the stores soon. I think you will be quite impressed by the results, the packaging is very attractive and the fragrance is alluring and is right on the mark in terms of current trends.

Finally, as we mentioned yesterday in our press release, we have been selected to develop and supply a new fragrance line exclusively for Anthropology stores, catalogues, and Internet business.

Moving on to European-based operations, the big news is our new license agreement with Jimmy Choo. From its founding in 1996, Jimmy Choo enjoys the stature one of the world's most prominent lifestyle luxury brands encompassing women's shoes and bags, more leather goods, sunglasses and eyewear. Its products are sold from a growing network of Jimmy Choo free standing stores, as well as in the most prestigious department and specialty stores worldwide. The Jimmy Choo store network now encompasses over 100 locations in 32 countries. Our plans called for our first Jimmy Choo fragrance to unveil in late 2010 or beginning of 2011.

Van Cleef & Arpels Collection Extraordinaire came to market in September with distribution reaching 1,000 doors worldwide, including Van Cleef & Arpels stores. The collection includes five Women's fragrances and one Unisex cologne. Also new was Paul Smith Man that debuted in the third quarter, will roll out continually.

As we mentioned in our press release, our current plans for 2010 include a Sports fragrance for men and women and cosmetics under the Burberry brand. If you follow the beauty blogs, you know the Burberry cosmetics collection will include about 100 products for skin, lip, and eyes, and we launch in 30 stores in July 2010. And for Lanvin, Van Cleef, and Paul Smith, we'll be creating a new Women's fragrance for each of these brands. We also are developing a new Van Cleef & Arpels fragrance for men in 2010.

Just a few other points to make before taking your questions, we recently welcomed RBC Capital Markets to the list of firms that follow Inter Parfums in research. As we have in the past years, we will again issue guidance for the coming year at the end of this month.

Inter Parfums will be presenting at the Sidoti & Company Emerging Growth and Institutional Investor Forum on November 20 in New York. We'll be presenting also on December 9 at Wedbush Morgan's California Dreamin' Conference, and we will participate in the Cowen Consumer Conference on January 11 in New York.

Since our next conference call will be next year when we report fourth quarter and year-end results, Russ and I want to assure a happy holiday season and all the very best thoughts next of the new year.

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

(Operator Instructions) And our first question will come from the line of Linda Bolton Weiser with Caris.

Hi. How are you guys doing?

Hi, Linda.

So, first of all, can you just -- on the hedging benefits that appeared in the gross margin performance in the quarter, can you just indicate, Russ, if there were any similar type benefits in the second quarter and if you could quantify them, if you could, and then do you expect more of the same type of thing in the fourth quarter?

Mr. Greenberg? Mr. Madar?

Yes.

Can you not hear us?

We were not hearing you, sir. We can hear you now.

You can, okay. Linda, did you hear any of my response?

I'm sorry, sir, she has disconnected. Would you like to move to the next question, sir?

Yes. Let's see if she can get back in the queue.

Okay.

All right?

Our next question will come from the line of Joe Altobello with Oppenheimer.

Hey guys, good morning. Actually I heard nothing of that, so if you want to start off with Linda's question, that would be fine.

Joe, can you hear me?

Barely, yes.

All right. I'll take you off speaker and try to answer the question. Joe?

Yes.

This better now?

Yes, much better.

Okay.

Linda, in answer to your question, as we reported there was approximately a 100 basis point benefit in gross margin for the nine-month period, and there was a 200 basis point benefit in the three-month period. The answer with respect to the first six months of the year is yes, they also did include a benefit, albeit a little bit smaller.

Since our hedging activities were done to hedge all of our US -- most of our US sales, our European sales in US dollars for the full year, the answer is yes, we do expect to see a similar benefit in the fourth quarter, albeit it depends -- the quantity depends on the US dollar-Euro ratio at the end of that period.

And Linda, if you get back in the queue, I'll certainly be able to answer your question again.

Joe, you want to go on and ask another question?

Sure.

I guess I just want to go back to the top line for a second. In the queue and also this morning, Russ, you mentioned that you guys are seeing a small recovery in terms of consumer spending and inventory destocking on the part of some retailers and distributors, but your local currency sales, or the decline, I should say, in local currency sales seemed to accelerate a little bit in the third quarter, so I'm trying to put those two different data points together.

It's real simple. As Jean mentioned in his remarks, the comparison that we had in the third quarter this year, the launched scheduled comparison this year versus last year, was huge. So in looking at the overall sales trend, we had a very difficult comparison, which caused the sales to actually decline slightly for the period. As far as the trends that we're seeing, we're looking more of current activity that we're seeing with our distributors and that our distributors are seeing within their respective retailers.

Okay. So it was essentially all timing but the underlying fundamentals, I guess the business are starting to improve a little bit. Is that a good way to describe it?

That's absolutely true, and we've seen very positive signs and even going into October where we started to see in July has certainly continued through the third quarter and seems to be continuing into the fourth quarter.

Got it, okay.

And then in terms of the use of cash, you guys have I guess $58 million of cash on the balance sheet now. How are you going to deploy that?

As usual, we're going to be very opportunistic.

We've historically always maintained relatively high cash levels in order to be in the right place at the right time with respect to potential acquisitions or potential new product lines. Deals similar to Lanvin or Van Cleef & Arpels where we can acquire a fragrance brand that has existing distribution is where we can actually deploy some our cash to use it to help grow our business.

So are you guys actively looking and is anything pending at this point or -- it's probably a sensitive subject but I'm just curious how far down the line you are in term of an acquisition.

Yes. Can you hear me, this is Jean.

Yes, Jean.

We have announced Jimmy Choo license agreement, but as you know this is not going to cost the company any cash.

Right.

We will be -- we are working on another license, which we hope will be able to announce end of this year, beginning of next year. So we are definitely active in looking for a new license in treating our possible (inaudible - multiple speakers) --

I was talking in terms of brand acquisitions, though.

In terms of brand acquisitions, we are also looking at least one brand and this will definitely use some of our cash to -- if we move forward with this acquisition.

Got it, okay. And just lastly, the exchange that you guys are using for your guidance this year, Russ, is $1.50 for the fourth quarter?

It's going to be an average over the fourth quarter. Right now we're pretty much at that $1.48, $1.49 so far for the average for the period of the fourth quarter that has already passed.

Okay. Perfect. Thanks, guys.

Thank you.

Our next question will come from the line of Jason Gere with RBC Capital Markets.

Hi gentlemen, this is actually Joseph calling in for Jason. Just a couple questions.

Not to harp on the top line, but if you could just give a little bit more clarity behind the sell-in trends for sort of the other brands, if you will, in the quarter and I know Burberry was up 19% local currency. If a total local currency was down 6%, that implies a pretty hefty negative for everything else and I know there were tough comps but if you could give us some sense into the sell-in trends for the remainder, that would be helpful.

Russ, you want to answer?

Yes. Again, as Jean said, most of it is the launch schedules.

When we look at Lanvin, for example, Lanvin, we did have a launch earlier this year in connection with the Sport fragrance with the use of Rafael Nadal. That compares to last year's third quarter launch of Jeanne Lanvin. When we look at the overall nine months, Lanvin sales were flat but they were certainly down in the third quarter.

Van Cleef & Arpels had a similar situation with the launch of Feerie versus the launch of Collection Extraordinaire, which is more of a limit the basis launch.

The last item just to -- and again, it's very difficult for us to look at some of the prestige brands and dissect it quarter by quarter, but the other significant one from a standpoint of percentage, not so much in dollars, is we have announced that we have discontinued or that we will discontinue the Quiksilver license effective June 2010. So we have already begun winding down some of our sales in connection with that particular product line, and from a percentage standpoint that was probably one of the biggest declines in both the three- and nine-month periods for 2009.

Okay. That's helpful.

And then given that the revised guidance of $400 million is basically implying up 3% for the fourth quarter and, if you sort of use the EUR 1.48, EUR 1.49, it still is implied that local currency sales are down but maybe the rate of decline is improving in the fourth quarter? Is that a fair assessment?

When we were approaching our fourth quarter, keep in mind that we're extremely optimistic and upbeat in connection with the trends that we've seen so far.

In coming out with guidance, this is the one quarter where you can actually calculate almost to the penny exactly what our numbers are looking to or what we believe our numbers are going to come out to.

Historically we have always taken a very conservative approach with visibility being as light as it still is. I mean we're seeing trends change, but visibility is still very, very light. It would be foolish for us to take an extremely aggressive position in connection with the guidance for the rest of the year. We will continue to evaluate it as time goes on, but looking at things now, we're very positive with respect to what we're seeing, but we want to be realistic. We want to be conservative, as we have always been.

Okay.

And then just finally, real quick on the gross margin. I know you said to expect similar hedging benefit, but is -- in the past, I believe, in fourth quarter you've sort of seen higher gift sets. So should that offset gross margin expansion in the fourth quarter a little bit?

It very well can. We typically do a lot of gift sets towards the end of the year. I even remember last year's third quarter was a very large amount of gift sets which actually ate into our gross margin percentage slightly.

We mentioned in our Q this year, the overall gross margin improvement was well over 200 basis points, only 190 or so were related to the hedging. As we move towards the fourth quarter, I think that some of the benefits we'll see from the hedging will be taken away in connection with product mix as a result of gift sets.

Going into this season with visibility being so low, we must give value to the consumer, or at least perceived value, in order to make sure that we can hold onto the sell through that's going to happen -- that needs to happen at retail.

Thanks very much, guys.

You got it.

(Operator Instructions) And our next question will come from Linda Bolton Weiser with Caris.

Yes, Linda.

Hi. Can you hear me?

Yes. I can hear you. Can you hear us?

Yes, I can. Somehow something happened earlier. I'm sorry. I got cut off or something, but just a little bit again on the -- well, on the currency. Maybe you talked about this earlier, but I'm a little confused about how the FX impact or effect on the top line growth in the quarter is plus 1%, whereas the Euro comparison is about negative 5% for the quarter. Can you just, Russ, kind of explain the accounting?

I'm just from a real -- I'll try to do it very simply. When we entered into cash flow hedges, we did that in October of 2008. When the exchange rate was around $1.25. All right. By locking in that $1.25 in cash flow hedges, it means that as we record our sales that are based in US dollars and allocate them to those hedge contracts, we book our sales at $1.25, even though the exchange rate on the date of the sale might be $1.40.

Oh, okay.

And we convert that from the dollar sale into Euros, you get a little bit more Euros in your sales number, but your cost of goods remain the same because all of our costs are incurred in Europe.

Okay. I think I got it.

All right? You lose a little bit of that when you then take it and translate it into dollars for the US consolidation, but that's a little more than what we need to go into here, all right? There is a little bit of an offset, all right? With respect to the overall sales figure, but that's basically the premise of how those FX contracts work.

Okay. So then an outside person, would I have been able to calculate, the FX effect on your sales in the quarter accurately as an outsider?

No. Because you have to know exactly how much sales -- US-based product sales we would have in any particular period and how the allocations are going to go through and then you'd have to anticipate what you believe to be the exchange rate at the time of the sale.

Okay. So then for the fourth quarter, and forgive me if you said this already, are you giving us some sort of guidance about what to expect for the FX effect on the sales performance?

What I basically said is our expectations based upon where the exchange rates are today, we expect a small benefit, all right, in gross margin as a result of the FX transaction.

What about on sales, though?

On sales. I'm only talking about on sales.

Okay, okay, great. Thank you very much, Russ.

You got it, Linda.

Our next question will come from the line of Neely Tamminga from Piper Jaffray.

Big picture question here, really for Jean, probably, and that is about just next year and looking at the launch schedule. It seems when we put the pieces together that next year has a pretty outsized launch here based on what we've been able to gather.

Just wondering how you guys view 2010 for your launch calendar in terms of your stable of brands, and then maybe how we should be expecting the mixed shift to evolve now that you've brought on a lot of these other US-based brands this you can ship internationally, just big picture help on that would be really helpful. Thanks.

I'm going to try. The big picture is out of Europe, we're going to have major launches for all of our brands. It didn't happen in 2009. It's going to happen in 2010. Van Cleef, Lanvin, Burberry, S.T. Dupont, Paul Smith are going to see all launches.

Burberry will be an important launch because we have the Men's and the Women's launch at the same time, and, of course, later on in the year we'll have the cosmetic lines for Burberry.

Going into the specialty stores in the US, we will launch two new fragrances for Gap instead of one this year. We will launch a flanker for Banana Republic. We will launch a new bebe fragrance in 2010.

So we're going to see a lot of activity in 2010, more activity in 2010 than in 2009, for sure.

I want to use this question to add something -- I want to add -- I want to use your question to -- we talk a little bit about this visibility and about the trends domestic and international. What we see something in July as a positive trend wherever department stores are restocking products is continuing into September and October. We at Inter Parfums have not shipped a tremendous amount of goods to the stores. We have -- most of the time we have shipped less than what we could have shipped because we want to make sure that the sell-through will be here for Christmas. We have made gift sets that are more value-oriented, again to increase our sell-through for Christmas.

So we are, like Russ said, optimistic, but cautious, in the sense that we want to make sure that these trends will be confirmed going into first quarter of 2010.

Thank you.

Our next question will come from the line of Rommel Dionisio with Wedbush Morgan.

Yes, good morning. With the rest of the SG&A, you've obviously done a great job of signing new licenses and acquiring new licenses, as well. Could you just talk about, and I know you'll get into more detail about 2010 plans a little later on in the month, but just talk about the outlook for SG&A going forward given obviously you'll require maybe additional manpower to address some of these new licenses for product development and so forth? Could you talk about that a little?

Yes. Certainly.

I think that the overall SG&A level with respect to the number of employees and where the real big dollars are spent, X-ing out the variable stuff, I'm even X-ing out a little promotional advertising, which can almost be manipulated -- not manipulated, but can be adjusted depending upon other factors. When we look at the overall fixed expenses, which is the expenses that can be leveraged upon, most of the new brands that we bring in, whether it comes in on the European side of our business from prestige fragrances or even here domestically, with a very small addition of fixed overhead expenses, we can clearly easily bring in significantly more revenue than we currently have.

The addition of a Jimmy Choo or any other additional brand that we are looking at very closely right now, we can pretty much maintain that with a staff level consistent with what we have existing, perhaps maybe one or two additional people. The same thing on the US side of our business. This new project that we're doing for Anthropology is not going to require the addition of any personnel in our US-based operation.

We are looking at other opportunities that we think we can also bring in with the existing leverage base that we have. So clearly we think there's opportunities to leverage our SG&A, but it's really dependent upon the complexity of any particular acquisition or new project that we bring in. The more complex you may need to add one or two people, but for the most part, we would expect it to leverage the existing SG&A.

And just a quick follow-up, if I may, do you feel comfortable quantifying the benefit to minimum advertising costs and royalties for exiting the Quiksilver contract?

Yes. I can honestly tell you that the costs of exiting, it was a mutual agreement between us and Quiksilver. So there will be no penalty with respect to unearned royalties or things of that sort and the costs to us of exiting, they are giving us sufficient amount of time to work to our inventory. So the actual amount of any losses in connection with this discontinuance is clearly immaterial.

Thank you very much, Russ. You got it, Rommel.

Our final question is a follow-up from Linda Bolton Weiser with Caris.

Hi.

Yes, Linda?

On Anthropology, did you give some idea about when the first products might be launched?

I can try.

So we have been approached by Anthropology to create really something unique for their 120, 130 stores here in the US, and our goal is to have a line of fragrance in their stores for Christmas 2010. It will be a signature fragrance for Anthropology, and we are -- as we speak here, we are working on the bottle and the fragrance in between the retail at the high end of the spectrum around $40 to $60, we are very happy that again we've been recognized as a leader in this model and that's why Anthropology came to us.

Okay. You said Christmas 2010, not Christmas '09, right?

No. Christmas 2010, yes.

Yeah, okay. Thanks.

Thank you.

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

Again, 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 usual, if you have any additional questions, I am always available by phone. Thank you and have a great day.

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