Interparfums Inc (IPAR) 2010 Q2 法說會逐字稿

Good day everyone and welcome to Inter Parfums Q2 2010 conference call. (Operator Instructions) I will now turn the conference over to Russell Greenberg. Please go ahead, sir.

Good morning. And welcome to our 2010 second 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 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.

Once again, when we refer to our European-based operations, we are primarily talking about sales of prestige fragrances which are mostly conducted out of our offices in France. When we discuss our United States operations, we are referring to sales of specialty retail and mass market products through our operations here in New York and New Jersey.

Now, some highlights of our record second quarter results. Net sales rose 22%, to $107.8 million, from $88.6 million. At comparable foreign currency exchange rates, net sales actually increased 28%. European-based sales rose 16% to $91.9 million, from $79.4 million, and US-based sales rose 71%, to $15.9 million, from $9.2 million. Gross margin was 60% compared to 57% for the quarter in the prior year. SG&A expense as a percentage of sales was 49% for both periods. Operating income rose 68% to $11.5 million, from $6.8 million, and our operating margin expanded to 10.7% of sales as compared to 7.7%. Net income attributable to Inter Parfums Inc. rose 27% to a record $5.4 million, from $4.2 million, and basic and diluted earnings per share attributable to Inter Parfums, Inc. common shareholders rose 29%, to $0.18 from $0.14.

Thus, for the first half of 2010, net sales were $227 million, or 27% ahead of last year's $179 million. At comparable foreign currency exchange rates, net sales rose 29%. Net income attributable to Inter Parfums Inc. increased 23%, to $11.9 million, or $0.39 per diluted share, from $9.7 million, or $0.32 per diluted share one year ago. I will once again cover the key factors impacting profitability beyond the obvious increase in sales. The improvement in gross margin was primarily due to product mix.

Foreign currency exchange rates had little effect on comparable period gross margin, as the 2010 benefits of a strong dollar matched the 2009 benefits from hedging activities. Although SG&A expense as a percent of net sales approximated last year's second quarter, SG&A expense rose 23%, in large part in connection with the major promotion and advertising campaigns associated with the global launch of Burberry Sport. During the current second quarter, there was a foreign currency loss of approximately $500,000, compared with a foreign currency gain of $2.6 million in the same period last year.

Year to date, the foreign currency loss was $2.9 million, versus a $3.9 million gain in the first half of 2009. For this reason, operating income rose at a faster rate than net income attributable to Inter Parfums, Inc. We again closed the second quarter with an exceptionally strong balance sheet and liquidity. Cash, cash equivalents, and short-term investments stood at more than $92.1 million, and working capital aggregated $178 million, for a working capital ratio of 2.4 to 1.

Long-term debt, which aggregated $10 million at June 30, declined nearly $8 million since 2009, year-end. As we reported yesterday, net cash provided by operating activities totaled $19.8 million, in the first half of 2010. That compares to $9.6 million from mid year 2009. Working capital items used less than $1 million in cash from operating activities, as increases in inventories and accounts receivable were offset by increases in accounts payable and accrued expenses.

Of note, we are seeing favorable collection activity, as days receivable outstanding declined from 115 days, as of June 30, 2009, to 87 days as of June 30, 2010. Finally, we once again have raised our 2010 guidance. As we reported yesterday, based upon our results to date, expectations for the second half of the year, and assuming the dollar remains at current levels, net sales should come in at approximately $445 million, resulting in net income attributable to Inter Parfums, Inc. of approximately $24.8 million, or $0.82 per share.

Let's also keep in mind this guidance takes into account the cost of the Burberry beauty launch which we have projected will cost us approximately $0.05 per share for the six months ending December 31, 2010. Jean, please continue.

Thank you, Russ. And good morning, everyone. We appreciate your participation on today's conference call. And, we are delighted by the upturn in our business across all our major brands and across all regions. With respect to European based operations, through the first half of the year, in local currency, Burberry sales rose 26%, Lanvin was up 21%, Van Cleef & Arpels increased 36%. S.T. Dupont rose 65%, and Paul Smith was up 12%.

As we reported last month, the sales gains are due to combination of new fragrance launches, including Burberry Sport for Burberry, Oriens, for Van Cleef, and two new scents for S.T. Dupont, Intense and Essence Pure ICE, as well as a strong sell-through of established scents. Thus far this year we have had robust sales growth in Asia, South America, the Middle East and Eastern Europe. Where in local currency, first half sales rose 39%, 67%, 22%, and 68% respectively. While sales in Western Europe and North America rose 12% and 14% respectively over the first half of 2009.

For the second half of the year, additional launches are under way with a fragrance from Lanvin called Marry Me, Paul Smith will have a fragrance called Sunshine, And Van Cleef & Arpels will have a fragrance for men called Midnight in Paris. Just last month, rollout of a Burberry Gucci collection of nearly 100 SKU cosmetic products began. This year, the collection will be in 30 very select doors globally, including Harrods in London, five (inaudible) locations in the US, (inaudible) in Canada, Galleries Lafayette in France, and (inaudible) in Hong Kong. In 2011, the door count should more than double.

It is now official, on July 1, 2010, we took over the worldwide license and commenced distribution of Montblanc, six legacy fragrance, acquiring approximately EUR3 million of inventory from the former licensee Procter & Gamble. The new Montblanc fragrance is planned for next spring. Moving on to the US-based operation, the strong upturn in sales was fueled by deeper and broader international specialty retail product distribution, as well as from new product launches. This includes two new scents for the Gap, one called Stay, for women, and [Crau] for men.

A second scent under the Bebe brand called Sheer, which is distributed at over 260 Bebe or girl in both North America and 14 other countries, where Bebe has a presence. Plus more than 300 dealer door and approximately 350 other doors. The launch is supported by a major advertising campaign in the September issues of leading fashion and women's interest magazines. In addition, international sales for our distribution network to retailer in Latin America, Europe, the middle and eastern Asia, is under way.

New Brooks Brothers fragrances, a scent for young women and a trio of brands for the brand's old Black Fleece label are unveiling in the fall, we're also working on brand extensions, holiday collections, and limited edition distribution products for all of our specialty brands. In some instance, collaborations work where exclusivity does not. Exclusivity was really not an option for Anthropology whose 142 stores carried products by many designers and manufacturers. We did, however, create an extraordinary brand appropriate with the collection for Anthropology called Happenstance, which includes perfumes, lotions, candles, diffuser, et cetera.

In addition, we have collaborated with the creators of [Verlabol] for another fragrance collection, both will be in the store for fall. In recent weeks, two new agreements were signed and both are excellent additions to our brand portfolio. Betsy Johnson, who is known for her, Celebration of Exuberance, the Embellished and the Over The top, has been working the fashion industry, with her unique and original designs, since the '60s. As we announced this month we are bringing to market a new twist on Betsey's first scent, which dates back to 1982. The scent will be sold at her 66 boutiques, her website and across 160,000 (inaudible) locations. We are working on a new Betsey Johnson fragrance for launch next year. Our agreement of (inaudible) cosmetics and personal care products, which are on the drawing board.

Also, an exclusive worldwide license agreement with Jones Apparel Group was unfurled for a woman's fragrance under the Nine West brands. The initial Nine West signature fragrance will be marketed and sold globally in better department stores, specialty retailers and Nine West retail stores, with an initial launch planned for the fall of 2011. Nine West products are currently sold in 59 countries, with flagship stores in leading cities including New York, Toronto, London, Paris, Tokyo, Hong Kong, Shanghai and Beijing.

As you can see, we have been rather busy over the past several months. Our record yesterday performance is indicative of the strength of our existing brand portfolio, the addition of new high value brands and our skill in developing and rolling out new brand appropriate products. Thanks again for your participation on our call and operator we can open the floor for questions. Operator?

(Operator Instructions) Our first question comes from the line of Linda Bolton-Weiser with Caris. Please state your question.

Hi, how are you?

Hi, good morning, Linda.

So can you just explain, I'm a little surprised that maybe the increase in the sales estimate for the year wasn't bigger, because the euro has actually strengthened a little bit, which should help, but your guidance implies a really big deceleration of organic growth in the second half of the year. I'm thinking low to mid single digit growth versus 28% to 29% you saw in the first half. So can you just talk a little bit about why that would be or are you just being conservative?

I think there are a combination of things that are in play here, Linda. One of the most important factors is the exchange rate differential. For the three months ended -- for the six months ended December 31, 2009, the average exchange rate was almost $1.50. It was actually around $1.60, $1.46, $1.47. Given the exchange rate, the average for the six-month -- for the three-month period that just ended, it was around $1.27. Lately, we've seen a little bit more strength and it actually has just passed the $1.30. With those exchange rates that differential accounts for about between 11% and 13%.

So the current guidance implies a decline in absolute dollars of around 5% or 6%. That's offset by an 11% to 13% swing in the exchange rate. You also have a little bit -- there was some slightly easier comparisons because the first six months of 2009, we were in the deepest part of the economic recession, which started to see a turn-around beginning in the second half of 2009. That combined with the inability to predict what the exchange rate is going to be, and we typically are a little bit on the conservative end, this is what led us to the $445 million that we put out as our guidance.

Okay. And then can I just ask on Burberry, clearly, the Burberry Sport was an important driver in the first half. First, did you find that there was maybe less cannibalization with this launch than others because it targeted a different consumer? And then secondly, when are you thinking the next major Burberry launch would be? Would that be next year or 2012?

I will take this one. I think we've seen exactly -- I mean less cannibalization with this launch because it is our first Sport line, so we are gearing the product to another different audience. And when you look at the sales increase in Burberry, nothing is due to the launch of the Sport but also due to the good health of the other lines. We are looking at -- I think what you are seeing a new Burberry, toward the end of 2011. So it could be past the 2011.

Great. Thank you very much.

Thank you, Linda.

Thank you.

Your next question comes from the line of Rommel Dionisio with Wedbush Securities. Please state your question.

Good morning, thank you. Both my questions are with regards to Burberry. The first, I know, obviously, the first half of the year, there was a lot of shelf fill for Burberry Sport, so I wonder if you could just talk about the retail offtake of that, the trends that you've seen, whether anecdotally or otherwise as well as perhaps even reorder patterns. It may be a little too soon for that but if you could--?

I have very difficult time to hear you.

Sorry about that, Jean. I was just asking about Burberry Sport, and if you could just talk about retail offtake trends, as well as maybe customer reorder patterns you've seen?

Burberry Sport, the setting was in (inaudible) but we knew because we are showing these products to the retailer a while ago, we had a good amount of inventory, so we are able to supply, quickly reorder. And as of now, almost all the markets are open, so we're really only working on sales and reorder and we're being very happy with the (inaudible) of Sport.

I think Rommel, you're making an interesting point, too, whenever there is an initial launch you do have a certain amount of sell-in and of course that's part of our sales and that's part of the growth that you see at launch time. We've got it down to such that the major countries are launched simultaneously.

We will continue to launch some of the smaller countries as the year goes on. But basically, the second six months of the year is really the reorders with a small amount of openings for additional distribution in other countries and other smaller-related territories.

Okay. And my second question is regards to the Burberry beauty launch. Russ, you said it is $0.05 dilutive in the second half of the year. Is that largely just the introductory advertising marketing support cost that is driving it?

That is not all of it. Again, when you're opening up basically shop and shops in 30 major retail locations around the world, you have not only the fixturing and the -- that's needed to actually build the individual stores, and whatever advertising you are going to put around them, but you also have the day to day operations of those individual stores.

Cosmetics are very different than fragrances from the standpoint of sell-through. All of those shop and shops, one way or another, the manufacturer is paying for all of the people that are manning those counters, and retail stores are open and it is not just open 40 hours a week so it is not like you can just hire one person. You need to man those stations for the duration of the period where the store is open. So there is a tremendous expense in connection with building this business, until it gets to a point where your sales are covering the ongoing operating expenses.

That's very helpful. Congratulations on the quarter. Thanks.

Great. Thank you very much.

(Operator Instructions) Your next question comes from the line of [Henry Kapelin] with Oppenheimer. Please state your question.

Hi, great. Thanks for taking my questions. I guess the first question is just getting back to the guidance a little bit -- the top line guidance, if we could just look at that a different way. Is there any -- would you be able to compare your launch schedule in the second half of this year to what it was last year in terms of either new products or your expectations?

The launch schedule for the second half of this year is -- I don't want to say it is light, because it is not really light. You are going to have new fragrances launched for most of the major brands. This is becoming an ongoing trend. The schedule used to be a new fragrance every 18 months to two years. Now, it is more like every 12 months to every 18 months.

So the launch schedule per se is really an ongoing organic business development. It is very difficult. When -- however, with respect to Inter Parfums, when there is a Burberry launch, then there is usually an additional growth factor, because of the size relative to the entire Company. I hope that answers your question. I'm not 100% sure.

So are you saying that the -- in terms of relative to last year, the launch schedule this year is probably going to be a little lighter? Is that fair?

It is similar, maybe slightly lighter.

Okay. And then my other question was in terms of the Burberry beauty cosmetics line, you said it is going to be $0.05 dilutive in the second half of this year. And then you're in 30 stores, you will be in 30 stores by the end of this year but then you said you want to double that to 100 doors next year.

I didn't say 100. Go ahead. Finish your question, go ahead. Sorry.

Okay, so I'm sorry, you wanted to double that next year. So in terms of the EPS impact for next year, what does that look like?

We haven't issued guidance for next year. The reality is, is what is going to happen, is that these first 30 stores are really the testing ground. We're going to see the territories and the locations where the product line has the most acceptance. In those territories, that's where you are going to be looking to expand to other locations.

As I said, we are looking to double, so if it is 30 today, we're looking at 60-plus stores perhaps for next year. From an EPS standpoint, I would rather wait until we issue guidance, but to be honest with you, because we are going to be selective with respect to the locations, and we have a little bit more of past history, I would imagine the effect would not be as significant as the current six months that we're approaching.

Okay. Great. Thank you very much.

Thank you, Henry.

Your next question comes from the line of Jason Geer with RBC Capital Markets. Please state your question.

This is actually Joe for Jason. Just a couple of questions. I noticed in the US business, you were able to turn profitable this quarter. There was a loss excuse me, this quarter last year, and I attribute that, I guess, to the better volumes and more product you're running through there. Given that a lot of your recent launches are actually I think in that segment, have we seen sort of the last of losses in that segment? Or should we still expect in some maybe seasonably light quarters potentially to see a loss?

If you followed the history at least for the last couple of years with respect to the US segment, we've had losses usually in the first six months. Then turning a profit at the end of the year. That business has become a lot more seasonal as we have built the specialty retail business, which is selling direct to the retailers, so it is much closer to the holiday seasons for the retailers. You are correct, we did turn a profit this second quarter in the US operations, versus a loss last year. And you are correct, it is basically the volumes. If -- in looking at some of the detail, the amount of leverage that we get off the SG&A is significant. All right? So if we can continue to build and to grow the volume, we would expect to be able to show the profitability even more so.

The first quarter of the year is still a relatively slow period of the year. These retailers are coming off a holiday season, depending upon how successful. That holiday season depends on their needs for additional product in the early part of the year. So I'm not going to predict. We don't issue guidance on a quarter by quarter basis. But in looking at the history, we're getting closer and closer to a profitability level in each of the quarters for the US operations.

So you're happier with the scale you're getting in that business?

Absolutely. We would like to see more volume. We can certainly handle more volume. We can certainly handle more deals. We are extremely happy to have brought Betsey Johnson and Nine West into the brand portfolio. We are thrilled with the renegotiation and the new contract that we entered into in March with Gap, this business is moving forward.

As Jean mentioned, we are also working with certain collaborations that -- where exclusivity is not possible, similar to what we're doing with Anthropology. We're hopeful to get some more of those kinds of deals and those kinds of opportunities to help build the volume in the US operations because that is the key to the profitability on that side of our business.

And then on the cash side, obviously as you highlighted, I mean the cash flow vastly improved this year versus last, and the cash balance, but a good portion of that, it looks like you put in CD's or some short-term investments. How should we think about that? Is that some sort of excess cash you've built up over the course of the year? Does it imply that maybe near term, there isn't sort of a meaningful acquisition or are you discussing together ways to use that cash?

We're always looking to be opportunistic. As disclosed in the 10-Q, these certificates of deposits are with maturities of approximately six months. Is it is just the interest rates today that you get for money in the bank, I don't have to tell you, it is almost nonexistent.

So going out even just those extra couple of months makes a significant difference in the amount of interest we can get on keeping that money at least, unused money, and earning some profits for us, or some dollars for us. But the balances themselves, as we have always said, we're going to keep them around to be opportunistic. We are looking, as usual, on several additional opportunities, no guarantees can be made of course, but that is the explanation we've always given for maintaining a healthy cash balance.

And then just one real quick, maintenance, was given that, I guess, the Burberry cosmetics launch is now rolled out was there any material costs incurred in the second quarter? Or is that still, is that mostly in the second half?

It is -- for all intents and purposes, it is all in the second half.

Okay. Thank you very much.

Okay. Thank you.

Thank you.

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

Hi, Russ. Hi, Jean.

Good morning, Mimi

Just two questions. Russ, I think the first one is probably for you. Regarding the performance of the US-based business, in the June quarter, obviously quite strong. If you could -- I guess it could potentially be a year-over-year comparison, expanded distribution geographically, new agreements, but also possibly inventory replenishment by retail. Between those four elements, what do you think the strength of the quarter in that business most heavily weights?

I think that most of it is really just increased volume from a better marketing environment. First six months of 2009 were dismal. International distribution of our specialty retail products almost came to a standstill. And our financials pretty much reflected that.

We saw relatively -- the numbers turn out to be modest declines but for us they were significant declines, with respect to that business in 2009, when you compare it to 2008. One of the nicest comparisons that we really have going here is from a sales standpoint, and a profitability standpoint. We always compare these results, from June 2010 to 2009. The better comparison is compare it back to June 2008.

Sure, I was just looking at that.

And you will see that we've got margin expansion from a period back -- yes, it is two, almost three years ago but that is the better comparison because we're moving back to the levels that we were before this economic recession. So I think that is really the biggest factor with respect to what happened with the US business. And hopefully, as I said before, if we can keep those volumes moving, that is going to drive the profitability.

Now, and I am looking, versus two years ago, this US-based business, the revenue base wasn't all that different. You improved somewhat. But can you tell me if the profitability was better in this latest quarter than it was two years ago?

I can do something like that offline.

Okay, sure.

By looking at past 10-Q, I am not prepared to answer that.

Got you. And then the second question, Russ, maybe for you, perhaps also Jean, but I think I saw something in print recently about Jimmy Choo potentially trading hands. Is that something that is on the table and is that something that has transpired already and how might it affect your agreement?

Jean, are you with us?

Yes, I'm with you. Listening. Carefully. Absolutely no comment on Jimmy Choo trading hands. We already are on time for our launch beginning of 2011.

Okay. Anything to add to that, Russ?

No, with respect to Jimmy Choo and its business and its operations, we cannot comment. With respect to our business, we are on target for a launch of Jimmy Choo.

And once the company changes hand, the company has been acquired two times over the last five years. So there is no change in Jimmy Choo per se or the -- the brand is very, very strong, and we're expecting a strong launch, especially in the US.

And Russ, were you saying that your plans for Jimmy Choo have not changed?

Right.

And that's early next year?

Early next year.

That's all I have. Thank you very much. Nice job on the quarter.

Thank you, Mimi

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

Hi, I was just wondering about the Montblanc business, and now that you've had a chance to take a look at it, in terms of inventory levels in the channel, what are you finding there? Is it pretty healthy? Pretty clean channel? And I think we were thinking annual sales, existing sales is something like $20 million to $25 million. Is that what we're thinking right out of the gate here or can you comment?

With respect to the channels, it is really still under evaluation. The reality is, is that the amount of inventory that we acquired is significantly lower than we had originally anticipated which kind of means that a lot of product was put into the channel. The amount of sales that we expect for Montblanc is built into our guidance for the current year. We have not commented with respect to an individual line as to how much business we think we can do.

This -- we did say, however, that this line historically has reached $25 million to $30 million. We certainly would expect that within a certain period of time, we can get it back. And then eventually exceed those levels. How long that is going to take, that is something that is really still under evaluation.

Thank you.

Thank you, Linda.

There are no further questions. I would now like to turn the call back to management.

Okay. Again, I want to thank everybody for their participation on this conference call. Whether you are on the call live or listening via our webcast. As usual, if any of you have any additional questions, I will always try to make myself available by phone. Thank you. 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.