Interparfums Inc (IPAR) 2010 Q3 法說會逐字稿

Greetings. And welcome to the Inter Parfums Inc. Third Quarter Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation.

(Operator Instructions) As a reminder, this conference is being recorded. I will now turn the call over to Russ Greenberg, Executive Vice President and Chief Financial Officer. Thank you. Mr. Greenberg, you may begin.

Thank you, Operator. Good morning. And welcome to our 2010 third 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 our Annual Report on Form 10-K, and the reports we file from time to time with the Securities & Exchange Commission. Inter Parfums does not intend to, and undertakes no duty, to update the information discussed.

When we refer to our European-based operations, we are primarily talking about sales of Prestige Fragrances, 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 third quarter results. Net sales increased 3% to $120.9 million, from $117.5 million. At comparable foreign currency exchange rates, net sales rose 13% for the period. European-based operations generated sales of $109 million, a 5% increase from $104 million. Sales by US-based operations were $11.7 million, down 14% from $13.5 million. Gross margin increased to 59%, compared to 57%. SG&A expense, as a percentage of sales, was 45% for both periods. Operating income rose 19%, and our operating margin increased to 13.7%, from 11.8%. Net income attributable to Inter Parfums Inc. increased 16% to $8.4 million, as compared to $7.3 million. And basic and diluted earnings per share increased 17% to $0.28, from $0.24.

For the nine months of this year, net sales increased 17% to a record $348 million, from last year's $297 million. In constant dollars, nine months net sales rose 23%. Net income attributable to Inter Parfums Inc., was up 20% to a record $20.4 million, or $0.67 per basic and diluted share, from $16.9 million, or $0.56 per basic and diluted share in the first nine months of 2009. The improvement in gross margin was primarily due to product mix within our European-based brand assortment.

As we reported, the strength of the US dollar relative to the Euro, benefited our gross margins through the first nine months of this year, in much the same way as the use of foreign currency forward exchange contracts did in the same period last year. In an effort to protect our gross margin from a weakening dollar for the remainder of 2010, we entered into foreign currency forward exchange contracts in the third quarter, to hedge approximately 90% of our fourth quarter 2010 European-based product sales, expected to be invoiced in US dollars.

SG&A expense, as a percentage of net sales, approximated last year's third quarter. Promotion and advertising expense included in SG&A, aggregated 16% of sales for both three-month periods, and royalty expense aggregated 9% of sales for both three-month periods as well. During the current and prior years' third quarter, there were foreign currency gains of $461,000 and $854,000, respectively. Year-to-date, the foreign currency loss was $2.4 million, versus a $4.8 million gain in the first nine months of 2009. For this reason, year-to-date operating income rose at a faster rate than net income attributable to Inter Parfums Inc.

We closed the third quarter with an exceptionally strong balance sheet and liquidity. Cash and cash equivalents and short-term investments aggregated $111 million. Working capital aggregated $205 million, for a working capital ratio of 2.5 to one. Net cash provided by operating activities totaled $31.3 million for the first nine months of 2010, as compared to $33.6 million for the same period last year. Working capital items used less than $1 million in cash from operating activities in 2010, as increases in inventories and accounts receivable were offset by increases in accounts payable and accrued expenses. In addition, due to favorable collection activity, days receivables outstanding, declined to 85 days as of September 30, 2010, from 111 days, as of September 30, 2009.

Finally, as you know, last month, we raised our 2010 guidance. Based upon the results of the first nine months of the year and delivery schedules for the fourth quarter, we expect 2010 to be the best year in our history, with net sales of approximately $455 million, and net income attributable to Inter Parfums Inc. of $25.5 million, or $0.84 per diluted share. Our guidance remains predicated on the dollar remaining at current levels. And we will be announcing our initial 2011 guidance on November 17th. Jean?

Yes. I will continue. Thank you very much, Russ. And good morning everyone. We appreciate your participation on today's conference call. I think we have covered the subject of third quarter product launches sufficiently in prior news releases and conference calls. Beyond holiday programs, most of our fourth quarter new product launches are for US-based operations. For Brooks Brothers, our newest women's fragrance, Madison, is in stores and in the Brooks Brothers website. For the [grand] Black Fleece, we will be introducing this month, the trio of scents called Red, White, and Blue.

We're also very excited about the two programs we created for Anthropologie stores. As most of you know, Anthropologie carries products by many designers and manufacturers. I hope you will visit the Anthropologie website or one of their stores, to see our initial products for the [very rich and very grandeur] Happ & Stahns collections. If I do say so myself, I think we have a real winner here, especially looking at the first readings of the sales last week. In addition, we, together with Anthropologie, collaborated with the founders of the New York Cult Fragrance House, Le Labo, to create a collection of five historically inspired scents, that pay perfumery tribute to when artisans crafted small batches, using the highest quality natural ingredients. Product packaging is in all apothecary bottles, and certain perfumes are in tins inspired by Turn-of-the-Century measuring weights.

With regard to new product launches for 2011, beyond the Jimmy Choo, Montblanc, Betsey Johnson, and Nine West product introductions that we have previously disclosed, we will reveal all of our current plans when we announce 2011 guidance later this month. Included in our plans are special programs for other retailers, again, collaborations rather than exclusives, which we expect to ship in 2011. We are also attempting to establish a foothold in the Hotel and Travel Amenities business, utilizing some brands already in our portfolio and others that we are exploring.

Moving on to important announcements we made in September, as we reported, Inter Parfums Luxury Brands recently formed a subsidiary of Inter Parfums SA, will assume distribution and related responsibilities for Burberry fragrance and cosmetics, along with fragrance Lanvin, Montblanc, and Jimmy Choo brands in the US starting in 2011. As we stated, our agreement with P&G Prestige, covering US distribution for Burberry and Lanvin is expiring at year end. We have entered into a four-year agreement with Clarins Fragrance Group to provide logistical and administrative support, and our two organizations will share and manage an expanded sales force.

Beginning in 2011, we will be recording wholesale sales, rather than ex-factory sales in the US, just as we do in Germany, in UK, in Italy, and Spain, through our [Majorie Dion] distribution subsidiary. We envision the higher gross profit for these sales, but also a higher SG&A expense as well. Our alliance with Clarins offers us a unique opportunity to develop a highly efficient organization, create synergies, and accelerate growth in the US markets. It may also serve as a foundation on which to bring US distribution of additional Prestige Fragrance under our control.

So, before taking your questions, a few final points. I hope some of you saw that Inter Parfums was on Forbes Magazine's list of "America's 100 Best Small Companies", which appeared in the November issue. Also, Russ will be presenting at the Sidoti New York Emerging Growth International Investor Forum on November 15. We'll also be presenting at Deutsche Bank Small Cap Value One-on-One Conference, also in New York, on November 30th, or December 1st. And we'll also participate at the Wedbush California Dreamin' Conference in California on December 7th. We hope to see some of you at these events.

Finally, since this is our last conference call of the year, we want to be among the first to wish you the very best for the holiday season and for the coming year. So, operator, you can open the floor for questions, please.

Thank you. (Operator Instructions) One moment, please, while we poll for questions. Our first question is coming from Linda Bolton-Weiser with Caris & Company. Please state your question.

Hi. Can you just elaborate a little bit more about the hedge that you put in place, I guess you said in third quarter? How will that actually affect the way the numbers are reported for the fourth quarter? I mean is it going to change the FX issue in terms of how the sales, the reported sales look, or is it just going to affect the growth margin? And also, I always thought it wasn't such a good idea to do these hedgings, because in a year from now, you're going to have a comparison that you're going to be up against. So, can you just talk a little bit more about the hedging issue?

Certainly, Linda. Good morning. The hedges that we put into place in the third quarter were done as the dollar began to weaken against the Euro, as we move toward the end of the third quarter. The effect is really to lock in the sale amount that is reported when we make sales in US dollars, that are reported by our subsidiary whose currency is the Euro. So basically, the adjustment is the sales. The net effect of that is to protect the gross margin. Alright?

Because those sales would be reported at the locked in exchange rate based upon the contract. And therefore, since all of our costs are incurred in Euro, it basically locks in that gross margin for the amount of the sales that were hedged. With respect to the effect that we saw earlier in 2009, we're only going out for a relatively short period of time. So we do not expect to see the type of volatility that we did in prior periods.

So, the hedge is only in place regarding the fourth quarter of 2010?

That's correct.

Ok.

As the dollar was relatively strong in the early part of the first nine months of the year, we did not enter into any hedge transactions. And that was basically the comment of my remark. That it enabled us to see the same gross profit benefit in 2010 without hedging, as we saw in 2009 when we did hedge, because the actual exchange rates that the sales were reported were very similar.

Ok. Alright. And then can you talk a little bit about, just roughly for next year, I know you probably don't want to get into too much detail, but remind me again, I think I had asked before about kind of a major Burberry launch, and remind us if that's in the beginning of 2011 or toward the end. And then do you think the year is going to be pretty even in terms of the sales growth, or is it going to be stronger in the first part of the year, or in the second part of the year? Can you give any kind of color about next year?

Hello, Linda. This is Jean speaking. Regarding the 2011 launch of a new Burberry fragrance, it's going to happen at the end of 2011. And we have already made presentations in the last couple of months to all of our [stockers] and our distributors, and we are booking space for, as we say, fourth quarter of 2011. And like you said, I'm not going to go now on details on the breakdown of sales by quarter or by period for 2011.

What we can tell you, if I may say, is that the new launch of a Burberry fragrance for 2011, is going to benefit investments that we have made this year to build our counters for the Burberry Cosmetics. Because we will be using these counters, which I think we have something like 40 as we speak, going maybe to 60, 70, in the next couple of months. We will be using these counters to promote the new fragrance launch, so it will be the first time that we have such a presence with the Burberry fragrance. That's all I can say for now, Linda.

Can you say how is the Burberry Cosmetics? Any early read on how that's coming out? Is it above or below your expectation?

Ok. Of course, I can. As you know, this Company is pretty conservative. And we like to be prepared for the worst. And the sales of the cosmetics are way above our projections. The first readings we have is very interesting. Yes, we are selling eye shadows, lipstick, lip gloss, and mascara. But very interestingly, everywhere we have put this counter, the sales of fragrance have increased dramatically. So, we are seeing here an extraordinary feat, so we think that our plan would be to increase a little bit faster with distribution of cosmetics going into 2011.

Thank you.

Thank you.

Our next question is coming from the line of Mimi Noel with Sidoti & Company. Please state your question.

Hi, Russ. Hi, Jean.

Hello Mimi.

Good morning, Mimi.

My questions have already been answered. But thank you.

Ok. That's great. Thank you.

Our next question is coming from the line of Henry Capelin with Oppenheimer. Please state your question.

Hi. Thanks for taking my questions. I guess my first question is just related to the guidance for 2010, and the implication that sales and earnings will decelerate. I'm just wondering if there are some upcoming items in the fourth quarter, perhaps related to marketing or something else, that we need to keep in mind.

It is a very good question, Henry. If we just take a little picture as to what our guidance is currently implying, obviously it implies an approximate down around 5% in sales. But that's not 100% accurate, because you need to take into the effect of the currency exchange rate. Which, right now, is around 1.38. Last year's fourth quarter was at around 1.48.

So, if you take into account the constant dollar effect, that negative five is actually a plus two or three. From an earnings standpoint, you also -- we're implying a down of around between 4% and 5%. Fourth quarter is a little unique for the most part, from the standpoint of holiday season. There is a large amount of slightly lower margin promotional type items that are sold into the marketplace. In addition, a lot of advertising expenditures are incurred during the fourth quarter, so as a percentage of sales, it might be slightly higher.

And the third effect with respect to the earnings, is, as Jean just mentioned, with respect to the Burberry cosmetics. We always indicated that there is a significant investment that is made in building these counters. We are extremely pleased that the sales levels at these counters, and the impact that they are having on our Fragrance business, is clearly exceeding our expectations. And that might help to mitigate some of these additional expenditures. But sitting here, with one month down, it's a little difficult to determine the exact effect that the current marketplace is going to have.

I can say that, you know, October is done, so we have seen our October numbers. October is a record month for the Company. We were building somewhat of a record month into our guidance, so I'm not saying anything different than what our guidance is implying. But clearly, the growth trends that we've seen in the third quarter, and for the most part, most of this year, clearly are continuing. And we will evaluate as time goes on, as we see a little bit more, and we get a little bit more of the inputs with respect to the picture as to what we're going to look at for the fourth quarter.

Got it. And then, I don't know if you provided this, this is more of a housekeeping question. But did you provide what the Burberry sales increase in the quarter, or what some of your other big brands did?

I think - - you may want to check in the actual Quarterly Report. I think we did talk - - if you give me one second. Yes. Burberry fragrance sales were up 18% for the nine months. Alright? We also talked that Lanvin was up 31% for that nine months. And Van Cleef and Arpels was up 33%, all of that in local currency. All of that information is disclosed in the Quarterly Report that was filed with the SEC last evening.

Ok. Great. Thank you.

(Operator Instructions) Our next question is coming from the line of Alex Fuhrman with Piper Jaffray. Please state your question.

Thanks, guys. It looks like you had a pretty great quarter. A lot of growth in some of the emerging markets, particularly eastern Europe and South America. Just trying to get a sense, bigger picture long-term here. How big can these markets be for you? And then how does that impact the margin structure of the Company as we move forward here? And I guess that would apply to Asia and the Middle East as well. Thanks.

I can try to answer. How big the markets can be? We think that these markets are really the future of our Company. That's why we have invested in China over the last ten years. We have built relationships with department stores for the sale of our fragrance. So, we think that China will represent more than 10% of our sales very soon.

The second market where we have also invested heavily is Russia. Most of our brands are advertised in Russia. We do have an exceptionally strong distribution.

Where we still have the work to do, I would say is more in the mature market, definitely the US. That's why we have decided to leave P&G, and go and form this alliance with Clarins. And we also have to do a better job in the western Europe and [Alberta metro] markets. For the US, and to go back to this Clarins P&G thing. You have to understand that the situation we were in with P&G was a little exceptional. P&G was distributing a product that it didn't make, and we were the only situation like that. And it is completely normal for them to push the brands that they are the licensee of, that they own. And we saw that in the last, I would say, 12 to 18 months, the level of attention deserved for our fragrance was not here.

So, what's going to happen with this Clarins association is, we will be handling all of the marketing expense. We will be spending more, I think, in the US markets, with in-store and in the media. And I think that the quality of the sale is going to be higher, better. Maybe not the level of sales, we're not expecting - - our goal is not to - - to start would not be to increase the sales that P&G was doing for Burberry, but more to look for better placement, better visibility in stores. That's my answer.

All right. Great. Thanks a lot, guys. And good luck.

Thank you very much.

(Operator Instructions) We will pause for a brief moment for additional questions. There are no further questions at this time. I'll now turn the floor back over to management for closing remarks.

Thank you, Operator. And thank you, everybody else for your participation on this conference call, whether you are live on the call or listening via our webcast. If anybody does have additional questions, as usual, I'm always available by phone. Thank you once again, and have a great day.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. And we thank you.