Interparfums Inc (IPAR) 2010 Q1 法說會逐字稿

Good day, everyone and welcome to Inter Parfums Incorporated first quarter 2010 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 Russell Greenberg, Executive Vice President and CFO. Please go ahead, sir.

Thank you, operator. Good morning and welcome to our 2010 first quarter conference call. Following the financial review, I will turn the call over to Jean Madar, Chairman and CEO of Inter Parfums.

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's annual report and 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. Once again, 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.

Now, some highlights for the first quarter. The year started off on a strong note. First quarter sales rose 32% to $119.4 million from $90.4 million. At comparable foreign currency exchange rates, net sales increased to 29%. Both European-based and US-based sales achieved comparable quarter growth of 32%. European-based operations sales were $108.3 million compared to $82 million in the prior year. Sales by US-based operations were $11.1 million, up from $8.4 million. Gross margin was 60.1% compared to 59.2%. SG&A expense as a percentage of sales was 46.7% compared to 47.9%. Operating income rose 56% to $16 million from $10.3 million, and operating margin expanded to 13.4% of sales as compared to 11.4%. Net income attributable to Inter Parfums Inc. rose 21% to $6.6 million from $5.4 million, and basic and diluted earnings per share attributable to Inter Parfums's Inc. common shareholders rose 22% to $0.22 compared to $0.18.

I want to point out several factors that affected our profitability. First, the improvement in gross margin was primarily due to product mix. SG&A expense increased 29% in dollars and a 32% increase in sales. And as a result, SG&A expense as a percentage of sales declined. This was achieved even though promotion and advertising included in SG&A expense aggregated approximately $18.9 million or 15.8% of net sales compared to $13 million, or 14.4% of net sales in last year's first quarter. Much of the increase was attributable to a major advertising program undertaken to support the global launch of Burberry Sport for men and women. Royalty expense included in SG&A expense was $11.2 million in the current first quarter, up from $8.5 million in the first quarter of 2009, and aggregated 9.4% of sales for both periods. The gross margin gain combined with the reduction in SG&A expense produced the 56% increase in operating income.

As you read in our news release, there was a foreign currency loss of approximately $2.4 million, or $0.04 per diluted share in the current first quarter versus a foreign currency gain of $1.4 million, or $0.02 per diluted share in last year's first quarter. That $3.8 million swing caused net income attributable to Inter Parfums Inc. to increase at a slower rate than net sales. We closed the first quarter with an exceptionally strong balance sheet and liquidity. Cash, cash equivalents and short-term investments stood at more than $103 million, and working capital aggregated $195 million for a working capital ratio of 2.6 to 1. Long-term debt decline nearly $4 million since 2009 year-end and aggregated $13.9 million at March 31. Net cash provided by operating activities totaled $8.6 million in the current first quarter, up from $1.9 million in last year's first quarter. During the current first quarter, working capital items used only $1 million in cash from operating activities as higher inventories and accounts receivable in support of current growth trends were offset by increases in accounts payable and accrued expenses. The $15.4 million, or 14% increase in accounts receivable reflects favorable collection activity.

As we announced yesterday, despite the current strength of the US dollar against the euro, we confirmed our 2010 net sales guidance of $440 million. Since a stronger dollar has a negative effect on reported sales, you may assume that our sales expectations in local currency are actually better than our initial forecast. We also raised our profit expectation due to the fact that in excess of 30% of net sales of European operations are denominated in US dollar, while all of its costs are incurred in euro. We're now looking for net income attributable to Inter Parfums Inc. to come in at approximately $24 million, or $0.80 per diluted share. As all, our guidance assumes the dollar remains at current levels. Jean, please continue.

Thank you, Russ and good morning, everyone. We appreciate your participation on today's conference call. As we reported last month, the 32% improvement in sales by European-based operations reflects some really stellar growth by the largest brand in our fragrance portfolio, two of which had new first quarter fragrance launches, Burberry Sport fragrances for women and men and Oriens, the new women's scent for Van Cleef & Arpels. In local currency, Burberry brand sales were up 25%, Van Cleef was up 55%. We have no new product launches, and Lanvin sales rose 20%.

In addition to looking at sales growth by brand, another view by region is also very encouraging. We're seen dramatic first quarter sales growth in local currency in Asia, South America and the Middle East, with comparable quarter sales gains of 53%, 41% and 47% respectively. In addition, one of the world's largest markets, western Europe, was able to achieve a 15% sales game. Sales in North America, another important market for our products, were slightly below last year's first quarter. To summarize our 2010 new product launch plans for European-based operations, for Lanvin, Van Cleef and Paul Smith were creating new human scents for each. And for Van Cleef, the fragrance for men is also in our 2010 lineup.

As we discussed on our last conference call in January, our 74% owned Paris subsidiary (inaudible) and Montblanc International signed an agreement which goes into effect on July 1 of this year. At that time, we take over the distribution of our six legacy fragrances. As we relayed on an earlier call, on a full-year bases, we look for Montblanc fragrances to represent approximately 8% to 10% of our European operation sales. Work has started on our first new fragrance under the Montblanc brand which we plan to launch in the spring of 2011.

Moving on to Burberry beauty, the collection is set to launch in July at about 30 doors worldwide, including Herrod's in London and Nordstrom in the US. It is being supported by a very strong advertising campaign featuring models such Nina Proctor, Lily Donaldson and Rose Huntington Whiteley. The collection is made of 96 SKU and is fully integrated with a Burberry style and attitude with packaging, featuring the bronze signature plate. In describing this collection, Christopher Bailey, Burberry's chief creative official, used the phrase a thoughtless elegance, and I concur. I likewise agreed with Herrod's GM manager for beauty who said that the color palette is "Aspirational, yet stunningly wearable". We've gone for sheer products for the face to create a natural glow and eye, cheek and lip items that enhance a woman's features. We plan to introduce additional product at that time and add another 30 to 40 more doors in 2011.

Moving on to the US based operation, I'm happy to report that after several years of declining mass market sales, that business picked up in the first quarter with sales up 20%. Our specialty retail sales have also showed good growth during the first quarter, in part due to the international distribution of products initially for the North American market. For instance, a product called Gap Clothes, which is distributed at Gap North American stores in the spring of last year is now being sold in Sephora stores internationally. And also, with Bebe signature that was launched domestically last summer is also doing quite well overseas. We have introduced a new fragrance -- a new women's fragrance called Stay in last months in Gap stores, and we have a new men's fragrance for Gap that will be launched in the second quarter of this year. For Banana Republic, we're expanding the franchise Republic of Men and Republic of Woman with some limited editions.

Other new product introduction for US-based operations include our second bebe fragrance called bebe Sheer, which we will introduce in the US and internationally towards the second part of the year. We also have a new scent called Miss Medicine for Brooks Brothers in the works plus three new fragrances for the Black Fleece label. We are also working on a special fragrance collection for Anthropologie stores for a launch later this year. As we have said in the past, we are pursuing an expansion of our plan portfolio on both sides of the Atlantic. While we're in discussions with a number of brand owners, there can be no certainty that any agreements will be consummated. Nonetheless, we are well-positioned in terms of financial strength, global distribution, sourcing, creative talent, reputation and business savvy to add a fragrance and beauty dimension to freshen and luxury brands that lack such a presence.

Before taking your questions in a second, I would like to point out that Russ Greenberg will be presenting at RBC Consumer and Retail Conference which runs on June 4 and the Piper Jaffray Conference which runs from June 8 to June 9. These conference are both in New York. We hope to see some of you there. So operator, you can open the floor for questions.

(Operator Instructions) Our first question comes from the line of Joe Altobello with Oppenheimer. Please state your question.

Hey, guys, good morning. The first question I wanted to address, the top-line growth. Is there a way to disaggregate that between the underlying improvement in consumer demand versus any inventory bills you're seeing or actually, a rebuild you're seeing amongst your distributors and retailers? amongst your distributors and retails.

We really have not even attempted to try to break down the details of exactly how much was each part as you just mentioned. What I can say is that the improvement is a function of both. Clearly, as we have mentioned, even on past calls, we have seen a slow and steady improvement in the retail marketplace from the standpoint of retailers building inventory. That is a slow process, and it is really on a country-by-country basis, which country is really going at a different pace. And then in addition we have the organic growth of the new launches we've put out in the current period, and I think it's really a combination of all of that that is -- it's definitely a combination of all of that that let us achieve the 32% growth.

Would it be fair to assume that roughly 50/50 of the growth is rebuild plus an increase in demand?

I didn't say that it was 50/50, but by looking at it from a macro standpoint, you would not be that far off if you attributed it to approximately a 50/50 split.

Okay, perfect. And then in terms of the Montblanc fragrance, you said it could be 8% to 10% of European operation sales? In what time period do you expect to get there?

That would be over a two to three year period, on a full-year basis.

Two to three, okay. And then lastly on the gross margin, you motioned that the increase was due to mix primarily. Could you give us a little more color there?

Yes. From our prestige -- from the European operations, Burberry typically does generate one of the highest margin items in our portfolio and therefore, that is what has contributed very handsomely to the increase in the gross margin during the period with a major launch of Burberry Sport being introduced in this first quarter.

Yes, but your Burberry sales increase was not that much different than the Company sales increase.

(inaudible) bigger part. Burberry sales increased 25%.

25% in local currency.

Right, but your overall sales are up 32%. Yes, but I'm just giving you a single for instance. Lanvin also generates a tremendous gross profit margin, and Montblanc increased, I think it was over 50%. Okay, I got it. So it's the new launches that are bringing that up. Okay, thanks, guys.

Thank you, Joe.

Our next question comes from the line of Mimi Noel with Sidoti and Company. Please state your question.

Thank you, hi, Jean, hi, Russ.

Hello, Mimi.

The growth you mentioned in Asia, South America and the Middle East, what brands are excelling there? Do you use some of your more mature, more established fragrances to spur growth there?

The same brand -- the brands are the same. It is Burberry or Lanvin. In the Middle East, (inaudible) is pretty strong (inaudible) also. No, it's the same brand --

But if you want to take Burberry as an example, is it Burberry Sport or was it Burberry London or Burberry Brit? Do you start with some of the older families?

Oh, all of the families are distributed in each of those countries.

I see. Okay.

Asia new market for Burberry and we have continued to see some growth, even with the existing legacy brands at Burberry. So not all the growth is coming just from a new launch of Burberry Sport.

Okay.

But in each of the countries, you are going to find all of the Burberry products, not just one or two of the families.

Okay, okay. And can comment at all on any shift in consumer behavior you have seen in western Europe in the last month or so? If you observed any?

We haven't seen any, we're looking at this carefully.

Okay.

And the good benchmark is Sephora, because they're entrenched in -- from the distribution point in Europe, and we have not seen our sales being affected by consumer or changes of shift in western Europe. Actually, western Europe was a good news first quarter and it has continued. I would like to say that it has continued very strongly in April. We have very strong business in western Europe right now.

Okay. I'm sorry, it was a little muffled, that benchmark you called out?

I said I'm using Sephora.

Okay.

Because Sephora has a distribution in France and Italy, in Spain and Portugal. So we are looking at their sell-through.

Great.

Most on a weekly basis, and there be (inaudible).

Nothing discouraging. Okay. Alright, that is good news. Thank you very much.

Our next question comes from the line of Linda Bolton-Weiser with Caris & Company. Please state your question.

Hi, how are you doing?

Hi, Linda.

So can you just clarify, in the Burberry cosmetics line, you say it's going to be in July. Is the product actually shipping out in the June quarter? Will by we're see it in the second quarter or more in the third quarter? And also, can you say -- you say 30 doors globally is that -- like Nordstrom in the US, is it only going to be in one Nordstrom or a couple of Nordstroms? You can explain how that works?

Yes, I will. We will ship that out at the end of June, beginning of July. So -- but anyway, it's not from -- from a sales point of view, it's not really materially, as we always said. And Nordstrom, we are going to select five to six doors in the US. And so it's not whole chain of Nordstroms.

Yes, we're really looking to go into their highest traffic doors here in the United States. It doesn't make sense to just be in one door. You have an entire east and west coast that you want to cover. But in most countries, it will be one flagship department store such as a Herrod's in London and a Galeries Lafayette in France.

Okay. There was an article in Women's Wear Daily and some industry experts actually seem to be pointing toward bigger sales potential than what I was thinking. Looked like it could be $10 million of sales for you in terms of the Burberry cosmetics.

I would like to know who are these experts. But from my point of view, our expectations are more qualitative than quantitative on these Burberry cosmetics. We want to use this launch corner that we are building in these major department stores to increase the visibility of a brand and I think that we're going to -- this is going to help in terms of the fragrances also. Because at the counter, we will sell cosmetics and fragrances. So let the experts say $10 million --

I don't know if they're talking retail or wholesale. We don't know.

But no, we are not look at, as we said before. We're looking at -- we are not looking at the high level of sale (inaudible) from these 30 doors. After that, based on certain results by country, we will roll out the distribution years two and next year. I don't see a more than $60 to $70 in US for this -- for the line of cosmetics.

Okay. And just -- I know you don't like to give guidance by quarter, but just with the guidance for the year of $0.80 and then what you did in the first quarter, is it possible the second quarter earnings could actually be down year-over-year or the operating profit could be down? Or have I got that wrong in my numbers?

We do not break down our guidance by quarter, so it's very difficult for me to answer that question.

Okay, alright. Thanks.

Thank you, Linda.

Our next question comes from the line of Rommel Dionisio with Wedbush Morgan. Please state your question.

Good morning. Thank you. I know this is one of your smaller business, but Jean, you said that the US mass market business is up 20%. Could you go into a little detail as to what really drove that? Is it greater shelf space or new products? Or could -- just go into a little more color there?

As we mentioned in our press release, we have seen declines in the mass markets for over five years, and I think that we have reached a certain bottom. So we don't think it will go lower than that. We had a 20% increase for the first quarter, due, I think, to a better active sense of some new product that we have introduced in the first quarter, the line of lotions and shower gels that we are selling in the mass (inaudible).

So can we assume that you are making a significant effort to make it a more concerted push behind that business, or is it just good numbers looking off --

We are -- it's definitely a segment that we do not want to abandon, so it's very encouraging that by bringing new products into this division, we have seen the immediate response with an increase of sales. But we continue to come up with new products in the mass market going forward.

Okay, thanks very much, Jean.

Thank you, Rommel.

(Operator Instructions) Our next question comes from the line of Neely Tamminga with Piper Jaffray. Please state your question.

Great, good morning. Two questions here, totally unrelated. But just following up on what Linda was asking about the quarterlies. Not necessarily looking for specific earnings guidance here, Russ, but it would be helpful to be reminded of the patterns of the brand launches and how that might be impacted by quarter? What we should be mindful of over the quarters to come?

The launches that occurred in the first quarter, which were primarily the Burberry Sport fragrance and the Van Cleef and Arpels women's fragrance. All the rest of the fragrance launches for the year are going to hit the market around September of this year. So you're going to see that probably in the third -- beginning of the third quarter. But you are going to see during the remainder of the second -- in the second quarter is the continued rollout of the Burberry Sport fragrance, the Van Cleef and Arpels fragrance and the beginning of the Burberry cosmetic launches.

When we're looking for the continuation, the rest, just order of magnitude, are the launches typically bigger in terms of revenue contribution, or is it the follow-through?

Go ahead.

Yes, what I can tell you regarding Burberry Sport, which is the biggest part of the business, we have shifted -- I would say that we have shift around 50% of our order in the first quarter, the countries that are launching as we speak. We will roll out -- we continue to roll out in April and in May. So a big, a good piece of the sale of Burberry Sport for men and women will happen in the second quarter. I don't know how much more detail --

No, that is helpful. And just one more thing related to that, just because it is such a large brand and a brand launch. I just want to make sure that we're getting -- we're all on the same page here. Am I also to understand then, the primary expense related to that launch is, in fact, imbedded in what you have just reported for Q1, that there really is not that much more incremental as it relates to the ad expense? Is that accurate?

Yes, I guess you're getting to the phenomenon that occurred a couple of years ago.

Yes.

This particular case it is not quite as obvious, because the launch began at the very beginning of the first quarter and this year with respect to Burberry Sport. So we have already, as our SG&A expenses point out, the amount of advertising spend already was up quite significantly from that of last year. That trend will continue as we move into the second quarter because the launch is going to continue and we're going to continue to push with advertising. The biggest part of the course of the spend is going to be towards the end of the year as you get into your holiday season, as it usually is.

Okay, that is really helpful, thank you. And then just one followup question on sourcing and costs in general. Wondering what guys are seeing as you sit here right now. Are you expecting cost increases to be right around the corner? Do you think it is something that can hold off until 2011? I'm wondering where the larger components of that cost decision is really coming in. Is it transportation? Is it extra raw materials?

No, I don't see any sort of major increase in the SG&A other than once we start with the Burberry cosmetic line, there you are going to see more of a spend because of the support that is needed with the respect of the personnel and operating the shop and shops for Burberry cosmetic.

Which is in our budget.

Yes, which is all part of our -- which is all built into our guidance. But from a cost increase, I don't really see anything that is suddenly going to start being material to the ongoing numbers that we usually report.

Fabulous. Thanks, you guys and good luck.

Thank you.

Thank you, Neely. Appreciate it.

(Operator Instructions) The next question comes from the line of Jason Gere with RBC Capital Markets. Please state your question.

Hi gentlemen, it's actually [Joe Spaken] in for Jason. Following up on the last question in terms of SG&A. I just want to clarify, are you talking about absolute dollars or as percent of sales? Because you actually -- SG&A was obviously up in dollars, but you did see good leverage off of that as a percent of sales and specifically in what I would term non-advertising royalty SG&A. So I didn't know if there was something affecting comparability there, or are there costs that -- you skimped last year when things were a little bit tougher that will eventually need to come back as we move throughout this year.

No, there is not something that we skimped on. As a regular percentage of sales, it should be moderate to the overall increase in the sale. I don't see anything that is going to increase our fixed SG&A expenses to any material amount. The only thing from the variable standpoint that may cost a little bit more is the additional expenses associated with the Burberry cosmetic business. But from a fixed expense standpoint, our infrastructure, both in the United States and overseas is set. The new lines that we have brought in, we should be able to get leverage as time goes on with respect to those fixed expenses if we can continue to grow our sales base.

Great, that is very helpful. Just on the -- getting back to the good growth in Asia ,Middle East and some of the other newer markets, is that -- is it possible to parse out, how much is that through new distribution arrangements, or is it just better to underline demand from those regions where the products are at? I imagine you're still adding on new distribution agreements there.

There is no new distribution agreements. Our products currently are distributed between 100 and 120 different countries. We use use somewhere around 75 to 80 different distributors.

We do not increase points. And if you look at our sales in China, we are not increasing the amount of door which we sell our products in China. If you look at our sales in Russia, we're not increasing the amount of those, we are not increasing sales because the stores are selling more productive than before.

Underlying demand.

Okay, great. And then just finally, I know you want to stay away from the quarterly guidance, but is there something structurally as to why second quarter gross margins sequentially are lower than first quarter? Or is that just have to do more with timing of launches throughout the year?

It's strictly timing of launches, Joe.

Okay. So, second quarter, given that there's still some flow-through of Burberry Sport, is there also flow-through of the Van Cleef and Arpels launch in the second quarter?

Absolutely. But of course, the line is much smaller, so it's a much smaller impact.

Okay. So that 60% gross margin level, is that something that could be hit again at some point through the year on the strength of launches?

I definitely think so. As we continue to increase our sales as a result of the, as we just talked about, the underlying demand, with respect to the prestige products, some of those products earn even a better than a 60% gross margin. So a lot of it is going to be based on that product mix, but most of the prestige brands should enable us to get very, very close, if not over the 60%.

For the year or in any given quarter?

In any given quarter.

Okay, great. Thanks a lot, guys.

Okay.

Alright?

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

Again, thank you. Thank you for your participation on this conference call and whether you are live on the call or listening via our webcast. If you do have any additional questions, as usual, I am available by phone. Thank you for joining us today, 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.