Interparfums Inc (IPAR) 2009 Q4 法說會逐字稿

Good day everyone, and welcome to Inter Parfums, Inc. fourth quarter, 2009 conference call. (Operator Instructions)

I will now turn the call over to Mr. Greenberg. Please go ahead, sir.

Thank you operator. Good morning and welcome to our 2009 fourth quarter and year end 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 reminds 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 sales of specialty retail and mass market products. After declining comparable quarter sales for the first three quarters of the year, we are extremely pleased by our strong fourth quarter financial performance.

As we reported yesterday, our fourth quarter 2009 results, as compared to last year's fourth quarter, are as follows. Net sales rose 13% to $112.9 million from $100.4 million. At comparable foreign currency exchange rates, net sales rose 2% for the period. European based operations generated sales of $96.3 million, a 16% increase from $83.2 million.

Sales by U.S. based operations declined 3% to $16.6 million from $17.2 million. Gross Margin was 56.1%, compared to 56.6%. SG&A expense, as a percentage of sales, was 42% for both periods. Operating margins came in at 12.2% of net sales as compared to %13.7.

Net income attributable to Inter Parfums, Inc. rose 7% to $5.5 million from $5.1 million. And basic and diluted earnings per share rose 6% to $0.18 versus $0.17. Moving on to full-year results, 2009 compared to 2008 are as follows. Net sales declined 8% to $409.5 million from $446.1 million. At comparable foreign currency exchange rates, net sales for 2009 also declined 8%.

Sales by European based operations were $362 million, down 6% from $386 million, and U.S. based operations generated $47.8 million in sales, down 20% from $59.7 million. Gross margin was 57% for both periods. SG&A expense, as a percentage of sales, was 46% in 2009, compared to 45%.

Operating margin was 10.9% compared to 11.4%, and net income attributable to Inter Parfums declined 6% to $22.4 million compared to $23.8 million. And finally, diluted earnings per share were $0.74 in 2009 versus $0.77 in 2008. Consolidated effective tax rates were 35% in both 2009 and 2008.

I would like to point out several factors that affected our profitability. Our 2009 results include a goodwill impairment loss of $1.7 million. In performing our goodwill impairment evaluation, we determined that Nickel Skin Care product sales continued to be below our expectations, resulting in the impairment charge.

For 2009, gross margin included a benefit of approximately 94 basis points, as a result of cash flow hedging activities which were entered into in late 2008 to take advantage of the effect that a strong U.S. dollar, relative to the EURO, has on our European-based product sales to U.S. customers. In addition to the positive effect on gross margin, in 2009 we generated pretax foreign currency gains of $3.2 million versus a charge of $0.8 million in 2008.

As we have said on prior calls, we've continued to keep a tight rein on SG&A expenses. Fourth quarter promotion and advertising included in SG&A expense, aggregated $9.5 million down from $11 million in prior year's fourth quarter, while royalty expense also included, in the fourth quarter SG&A expenses, rose to $9 million, up from $7 million in last year's fourth quarter.

As a general rule of thumb, higher sales of licensed brand products results in a higher royalty expense. For the full year, promotion and advertising, aggregated $55.8 million, down from $65.8 million in 2008. And royalty expense aggregated $35.5 million, compared to 2008's $37.3 million . We closed the year with an exceptionally strong balance sheet and liquidity, including cash and cash equivalence of over $100 million.

At year end 2009, working capital aggregated $198 million, and we had a working capital ratio of almost 2.9 to 1. Long term debt declined $9.8 million in 2009, and aggregated $17.9 million at year end. Net cash provided by operating activities totaled $84.6 million in 2009, as compared to a use of $6.4 million of net cash for operating activities in 2008.

We reduced inventories by 31% to $85.4 million at year end 2009, from $124 million at 2008 year end. And, accounts receivable declined 16% to $101 million at year end 2009, as compared to $121 million in 2008. As we reported in January, our Board Of Directors approved an almost 100% increase in the quarterly cash dividend to $0.065 per share, which brings the annual cash dividend to $0.26 per share. The decision to increase our dividend underscores the Board's confidence in our 's future outlook and strong financial position.

We again confirmed our 2010 guidance yesterday. We expect sales to come in at approximately $440 million, resulting in net income attributable to Inter Parfums, Inc. of around $23.5 million or $0.78 per diluted share. As we reported when we announced our 2010 guidance, our net income attributable to Inter Parfums and diluted EPS, factors in approximately $1.5 million or $0.05 per diluted share of expenses associated with the launch of the Burberry cosmetics line.

As always, our 2009 guidance assumes that the dollar remains at current levels, and that no new licenses, or specialty retail agreements, will be entered into. Jean, please continue.

Thank you, Ross, and good morning, everyone. Thank you for your participation on todays conference call. Moving on to our latest news, in January, we announced that our Paris subsidiary, Inter Parfums SA, and Montblanc, International signed a license agreement to create, produce and distribute perfumes and ancillary products under the Montblanc brand. This license agreement is for ten and a half years, and will become effective July 1, 2010.

Montblanc, a more than 100 year old luxury brand, is best known for fine writing instruments, and in the past few years, Montblanc's product range has been expanded to Swiss men's watches, men's accessories and women jewelry, luxury leather goods and eye wear, which are sold in 70 countries, including a network of more than 350 boutiques worldwide. The existing Montblanc fragrance business, currently incorporates six lines of women and men's fragrance, which are distributed in 50 countries. We paid a very small upfront fee of approximately $1.4 million for the license and we expect to purchase inventory from the licensee, estimated at $5.7 million.

On a full-year basis, we believe that the Montblanc fragrance could represent 8% to 10% of sales of our European operations. Our plans call for our first new fragrance launch under the Montblanc brand in spring, 2011. On our last conference call, I discussed the details of our new 12-year license agreement with Jimmy Choo, but what I can add to the discussion, is that our first Jimmy Choo fragrance is scheduled now to launch in early 2011. We will provide further details as the year unfolds.

Since we previously covered our 2010 new product launch plans for European-based operation, I will just summarize for you. For Burberry, we have a sports fragrance for men and women that we're rolling out now. And, the Burberry cosmetics collection with about 100 products for skin, lip and eyes, which we launched in approximately 30 shops worldwide in the month of July.

For Lanvin and Van Cleef, and Paul Smith, we're creating, for 2010, a new woman's scent for each, and for Van Cleef, we'll have also a fragrance for men in our 2010 lineup. Moving on to the U.S. based operation, I'm very pleased to report that earlier this month, we signed a new specialty retail agreement with Gap, which runs through December 31st, 2011, covering Gap and Banana Republic brands in the U.S. and Canada, with similar terms and conditions to those of the original agreement, which has expired on August 31, 2009. In the interim, we had entered into a series of short-term extension agreements, while our two Companies were in discussions for more agreements.

While we are on the subject of Gap, we've got new products launching, plus expanded distribution in the works for both brands. A new woman's fragrance is set to launch in Gap stores later this month, and the new men's scent is debuting in May. Additionally, a number of Gap ancillary and companion products from body washes to home fragrances products for the brands, [Legacy Scents], are coming to market this year. For Banana Republic, we are doing a limited edition of Republican Of Men, and Republic Of Women brand extension.

We are also growing our specialty retail business through international distribution. The fragrance, Cloves, which was introduced domestically last April, began its international rollout last fall; and by the end of 2011, we expect Cloves to be in the $5,000 dollars. The rollout continuing to this year with a (inaudible) launch underway, to cover more than 500 doors, followed by (inaudible) in the Middle East.

Our Banana Republic products are in about, today, 30 countries, and we have achieved significant market penetration in certain markets. Our first Bebe fragrance is also going global. There is product on the shelves, or soon will be, throughout Central and South America, the Middle East, and Far East.

To highlight other new product introductions, we have our second Bebe fragrance, called Bebe [Sheer], on our launch schedule for domestic and international distribution for this year. We also have a new youthful scent called, [Miss Madison] for Brooks Brothers in the works, and three new fragrances under the brands Higher End Black [Fleece] label, Red White and Blue. Later this year, a special fragrance collection for (inaudible) stores is being readied.

This may be one of the best business environments in which to add brands to our portfolio. Many of our larger companies are pairing their secondary names to focus on the megabrands. We are ready for this opportunity. We have financial flexibility, talent on both sides of the Atlantic, the infrastructure and distribution in place, and the reflexes to move quickly when necessary.

Of course, we cannot assure you that any deals will be consummated, but we will report, of course, if any material developments. Before taking your questions, I would like to point I would like to point out that it will be Russ and myself presenting at Sidoti Emerging Growth Research Conference on March 23rd. Then, the Oppenheimer one on one conference the following day, and we'll be also at the Telsey Advisory Group Consumer Conference on April 15, all in New York.

We also plan to webcast our presentation at the Telsey Advisory Group Consumer Conference. So, Operator, you can open the lines for questions.

(Operator Instructions) And, our first question will come from the line of Jason Gere, with RBC Capital Markets.

Good afternoon, gentlemen. This is actually Joe [Spaken] in for Jason.

Hello.

Hello. First off, if you could just give us a little bit of insight into sort of the POS trends versus your shipping trends, how you see that relationship working, and if you could maybe compare how that looks to what you saw about three months ago?

Russ?

From the retail trends that we're seeing, is that it was clearly a consumer coming back to the market, which began, actually, as far back as July. That trend has continued. It continues slowly.

It's not that suddenly the mind-set of the consumer has decided that the recession is over and they're going to spend dollars. That's absolutely not the case. But, they are starting to make the trend back into the market, and I think that that's what we're seeing with respect to our sales.

Our distributors are willing to take more inventory. They are shipping more product into the retail marketplace. The retailers themselves are stocking merchandise, and this is a trend that so far, from what we've seen in early 2010 is continuing. So, we basically have a slow buildup to hopefully get back to where we were before the recession began.

Yes. I will add that the strong improvements that we saw in the fourth quarter continued in January, February and the first weeks of March.

Okay, great. And then, you know, it was definitely good to see, you know, the turn around in, you know, sort of constant currency sales in the fourth quarter, which was the first time in a number of quarters, and you guys highlighted that. But, you also mentioned that advertising was down and was down pretty significantly in the quarter. So, you were able to see that growth despite advertising. Now, can you talk a little bit about the advertising plans going forward? I mean, I would assume it needs to go higher.

You know, advertising, we've, if you go back and look at even prior releases, advertising for the full year is down approximately 15%. When we entered into 2009, and issued our initial guidance for 2009, we anticipated sales were going to be down approximately 15%. We typically will budget our advertising plans around our selling plans. That's one of the ways we can maintain the profitability on a consistent basis.

So, going into 2009, the plans were to right-size the advertising budget, to what we based our overall sales expectations were. So, it's not surprising to us that sales ended up, I'm sorry, that advertising ended up down, approximately the same percentage we anticipated sales being down. Keep in mind too, that when we moved into the fourth quarter, or reported our sales results for the fourth quarter, we exceeded our expectations. But, the advertising budgets and programs that were in place were already set months before.

And, I will add also that we have benefited from a certain decrease in advertising rates, so even though in dollars we spent more, the coverage that we have in [mid-year] with the amount of pictures has been in line with the sales that we have.

And, has there been any pushback for you guys from distributors or retailers for you do it, to advertise a little bit more?

Not at all.

It's just something we decide internally, it's not our distributors.. Our distributors share in our advertising costs, but it's not something that's dictated by the retailers.

Okay, and then just one last one.

And the fact we have gained market share in many countries, proves that it was a good decision to cap these type of expenses.

Okay, and one last quick one on gross margin. I know you - - the cash flow hedges, if my math is right, it looks like - - I think you said about a hundred [pips] for the year. So, that was probably like over 150 again for the for the quarter, and that ends, right, so in 2010, now we look at the EURO rate, and it's being compared to the hedges in 2009, which had you at about a 1.25 rate, if I recall correctly.

Around 1.25, 1.26. I compare it to a current EURO exchange rate today of around 1.36.

But that ended in the fourth quarter - - the hedges?

The series of hedges that were entered into in 2008, yes, those ended in 2009.

Okay, great, thanks.

Okay.

(Operator Instructions) Our next question will come from the line of Linda Bolton-Weiser with Caris.

Hi, how are you?

Hi, Linda.

Can you, you know, there's been a lot of investor questions about Europe, given everything that's going on there, and you guys have a pretty big exposure. Can you talk about what you're seeing - - if you're thinking of changing your business plans in any way this year based on what you're seeing in Europe? Can you just talk about that a little bit?

First, we don't see any negative - - we have not been affected in the first two months of the year with the situation in Europe, which is really limited to certain countries in Europe. If you're talking about Greece, Greece does not even represent 1% of our sales. But, we have strong brands in Europe. I'm thinking of the Paul Smith in UK, I'm thinking of Burberry, where over 35% of the sales, or 40% of the sales are made in Europe, and we do not see any problems with our brands in Europe today. Unless you want to add something?

Yes, I guess the most important thing that we say, you know, overall as a result of, if you look at 2009 results, our sales in Western Europe, for example, overall were pretty flat compared to 2008. There were certain countries that are - - it's very specific, I mean countries like the UK was down in 2009. Certainly, Spain was down, but then you turn to countries like France where it was up. So, overall when you take the territory as a whole, Western Europe really didn't pose any specific problems, nor do we anticipate any.

Okay. Can I just ask you about your guidance for 2010? We calculated that the Montblanc license could be maybe a nickel, $0.05 a share accretive to earnings in the second half of the year, and yet you're not really raising your guidance at all. Plus, my understanding is that the weakening of the EURO actually kind of helps your bottom line earnings grow. So, with these kind of things going your way, why is it you would not raise the EPS guidance for the year?

I think the first step is with respect to Montblanc, the reality is that we are first going to be taking over this line effective July 1. So, here we are sitting in March, and we don't know what the shape of the line is actually going to be on the day of transition. We don't know what the inventory levels - - we have estimates, but we don't know what the inventory levels are going to be on the day of transition. That's a big unknown. There are times in the past when we took over a brand like Lanvin - -

Or Van Cleef - -

I was going to say - - the difference between Lanvin and Van Cleef, is with Lanvin, the market was in good shape, so we had an immediate infuse of sales and profitability. Van Cleef & Arpels, the market was not in such great shape. The inventory levels that we ended up buying were very small compared to what the original estimates, and took almost six to nine months to get the line back into a normalcy. So without knowing, it's very difficult to project what you don't know yet.

Okay.

So, that's one of the reasons, that as far as Montblanc is concerned, we know what the sales could be, and - -

We took a conservative approach on the sales of Montblanc. As Russ said, the license really starts with July 1. So, we think that in the first three, four, five months, we're going to build inventory, and the important thing for us is going to be the new fragrance that's going to start in 2011, even though we're going to have some sales from the original line that P&G was producing.

Okay, and then - -

Regarding, Russ, you also want to answer regarding exchange rate? Because, the exchange rate has changed drastically in the last three months.

Yes. I wouldn't say drastically, but from when we initiated our original guidance, the rate was around 1.45, 1.46, 1.47. Today it's 1.35, 1.36. We all know the effect that it has.

It typically will hurt our sales. We did not change our sales guidance, because we feel that we still are very comfortable with a $440 million dollar estimate. And, it could help us a little bit from the standpoint of earnings, but we felt that the numbers didn't change all that significantly, so we left our guidance the way it is as of now.

Okay, and can I just ask one final one about your cash balance and the really strong position of your balance sheet? What are you doing do with all this cash?

What are we going to do? We think, as I said during the conference, we think there will be some opportunities, and we are actively looking for activities for a new license or potential acquisitions of names or businesses, and we think that opportunities are going to be interesting this year. As, like I said, bigger companies are going to look at the portfolio and do some [arbitrage] in their brands. So, we'll be here to take care of opportunities.

Okay, thanks.

Thank you, Linda.

Our next question will come from the line of Henry Kaplan with Oppenheimer.

Hi, yes. Thanks for taking my questions. Just, I guess I wanted to jump back to the advertising and promotional expense you mentioned earlier. When you said that you kind of budget your A&P spending to be consistent with your sales expectations, would you expect your - - are those sort of 1 to 1? Is that kind of a 1 to 1 expectation? So, if your sales are expected to increase 7%, say, would your A&P expected to increase 7%.

No, it's not a 1 to 1. And, it also depends on new product launches.

Okay.

In 2009, for example, we did not have a master brand, if you will, of Burberry launching, specifically in 2009. When you have a new launch for a new fragrance for one of the largest brand within our portfolio, you're going to typically see a higher percentage of your sales spent in advertising. When you look at 2009 versus 2008 as a percentage of sales, you see that this year we spent about 13.6%. Last year was 14.7%.

Historically, we can spend anywhere from your 13%, 14% to as high as 16%, 17%, depending upon the number of new launches and the brands we'll be launching specifically in that particular year. I would tend to say, as we go into 2010 - - and this is of course included with the guidance that we have - - we would expect to see certainly higher, as a percentage of sales, in 2009 for advertising and promotion because of the new product launch schedule.

Got it. Okay.

Great.

If you could just talk about your tax rate. It kind of bumped up, you know, in the fourth quarter. I just wanted to know what you would expect that to be. What you're looking for that to be in 2010 - -

The tax rate is very funny because it fluctuates at different times during the quarters. When you look back, if you look back, over the last number of X number of years, this 35% rate on an annual basis tends to be where it ends up. It could be high in certain quarters; it could be low in certain quarters.

A lot of that depends upon the profitability of our subsidiaries, of our joint venture subsidiaries. Again, if there are losses - - I've said this before - - if there are losses in connection with the subsidiaries, we do not take the tax benefit of those losses, because there is no guarantee they are going to be realized, alright? On other quarters, those losses reverse themselves, because typically the distribution subsidiaries are set up to break even. So, it's the individual profitability fluctuations in the middle of quarters that causes the over all rates to fluctuate. On an annual basis, I think 35% as far as I remember, going back the last three or four years.

Okay, great. Just the last question, in terms of currency hedges going forward, do you have any in place, or do you - -

We always have currency hedges in place. It depends on what we are going to hedge. What we did last year in 2008, was to take advantage of an opportunity, which was a sudden strengthening of the U.S. dollar. We don't really see that - - typically what we normally will hedge, is hedge the receivables. So, that the idea would be to have minimal gains and minimal losses in connection with foreign currency transactions.

That's the normal type of hedging that we do. If we see that the dollar does gain some strength, and we feel that at that level it makes sense to enter into some cash flow hedges, we will evaluate that on a case-by-case basis.

Okay, but at this point, your expectation is that the cash flow hedges will essentially be neutral to earnings in 2010, is that fair?

I'm sorry, can you say that again?

I guess at this point, given where your cash flow - - your hedges are - -

They'll run through P&L.

But would that be expected to be neutral essentially to 2010?

I think that you still have a little bit of the wind-down of the 2009 cash flow hedges. So, you'll probably have a little bit of additional losses in the first quarter. But as of right now, based on our positions, which are strictly AR-type hedging activities, I would expect it to be neutral.

Great. Thank you very much.

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

Thank you, operator. And again, thank you everybody else who participated on the conference call, whether you are live on the call or listening via our Webcast. And as always, if you have additional questions, I always try to make myself available by phone. Have a great day and thank you.

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