Interparfums Inc (IPAR) 2010 Q4 法說會逐字稿

Greetings and welcome to the Inter Parfums, Incorporated fourth quarter and year end 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. Now I will turn the call over to Mr. Russ Greenberg, Executive Vice President and CFO. Thank you, Mr. Greenberg. You may begin.

Thank you, Operator.Good morning, and welcome to our 2010 fourth quarter and year end 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 just 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 of Forward-looking Statements and Risk Factors in Inter Parfums' annual report on form 10-K and the reports Inter Parfums filed 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 usual, when we refer to our European-based operations, we are primarily talking about sales of Prestige fragrances conducted out of our offices in France. And when we discuss our United States operations, we are referring to sales of specialty retail and mass market products through our operations in New York.

Now fourth quarter financial highlights. Net sales were $112.4 million, off slightly from $112.9 million. At comparable foreign exchange rates, net sales actually rose 6% for the period. European-based operations generated sales of $95.5 million compared to $96.3 million.

Sales by US-based operations were $17 million, up 2% from $16.6 million. Gross margin increased to 59% compared to 56.1%. SG&A expenses as a percentage of sales was 48% compared to 42%. Net income attributable to Inter Parfums, Inc., increased 14.5% to $6.2 million as compared to $5.5 million. And basic and diluted earnings per share increased 11.1% to $0.20 from $0.18.

2010 was the best year in our history. Net sales for the full year increased 12.4% to a record $460.4 million from 2009's $409.5 million. In constant dollars, 2010 net sales rose 18%. Gross margin was 59.5%, up from 2009's 57.2%. The improvement in gross margin was primarily due to product mix within our European-based brand assortment.

In 2010, increased sales of higher-margin and larger sized projects combined with a lower proportion of promotional sales contributed to the improvement in gross margin. The strength of the US dollar relative to the euro benefited our gross margins in 2010 in much the same way as the use of foreign currency forward exchange contracts did in 2009.

Something else to consider as you review our 2010 fourth quarter. As of December 31, 2010, we repurchased the inventory of Prestige finished goods from our former US distributor, as our recently established subsidiary, Interparfums Luxury Brands, has taken over US distribution of Prestige finished goods. The repurchase of this inventory, which aggregated approximately $5.7 million, was accounted for as a sales return in 2010. I am sure I'm going to get some questions later on this.

SG&A as a percentage of net sales increased 47% from 46% in 2009. Promotion and advertising expenses included in SG&A aggregated 15% of net sales in 2010, as compared to 13.6% of sales in 2009, while royalty expense included in SG&A was 8.7% of net sales in both 2010 and 2009. Net income attributable to Inter Parfums, Inc., was up 18.9% to a record $26.6 million, or $0.87 per diluted share, from $22.4 million or $0.74 per diluted share in 2009.

We closed the year with an exceptionally strong balance sheet and liquidity. Cash and cash equivalents and short-term investments aggregated $87 million. Working capital aggregated $184 million for a working capital ratio of 2.5 to 1. Long-term debt, excluding the current portion, was only $5 million, down from $18 million at 2009 year end. 2010 year end inventory levels are higher than one year earlier. However, they are just about $3.5 million more than at September 30, 2010. And 2011 started off with the launch of Jimmy Choo signature fragrance. In addition, we now carry on our books the inventory for US Prestige product distribution, and we have a vibrant new product launch scheduled in the works for the current year.

Net cash provided by operating activities totaled $37.8 million in 2010. Working capital items used less than $6 million in cash from operating activities 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 83 days as of December 31, 2010, from 98 days sales one year earlier.

As we announced in January, we have raised our 2011 guidance to reflect the addition of a new Burberry fragrance to this year's lineup. Our guidance also reflects the inclusion of the Legacy Boucheron fragrances and Montblanc for a full year versus six months in 2010. We expect sales of $525 million, with resulting net income attributable to Inter Parfums, Inc., of $30 million or $0.98 per diluted share. As usual our guidance assumes the dollar remains at the current levels.

Jean, please continue.

Thank you, Russ and good morning, everyone. We appreciate your participation on today's conference call. I think we have covered the subject of 2010 public launches sufficiently in prior news releases and conference calls, so I will use this opportunity to discuss some of the new programs for 2011.

Starting with US-based operations for a change, I will highlight some of the major launches planned for this year. For Banana Republic, a new women's scent called Wildbloom was launched in the stores in February with international distribution beginning in late spring. For Gap, we are building upon foundation laid by the fragrance called Close and Stay for woman. We have a launch of Near this month in Gap stores in North America.

Similarly, the Gap men's fragrance also is growing with a product called Gap Geek coming on the heels of 2010 Gap Core. We have also a new Bebe scent called Bebe Gold coming to Bebe stores in late summer, along with other domestic specialty in department stores which will be followed by international distribution soon after.

For Nine West and Betsey Johnson, our first new scents are due out in their respective stores, as well as other department stores, in late fall. We plan to roll out Nine West's scent internationally at the very end of the year, and Betsey Johnson next year.

In addition to fragrance, we are extending our nail and lip color collection, especially for Bebe and Gap brands; and we're doing more in candles, particularly for Banana Republic.

Now going to Europe. Although in-store distribution, the Jimmy Choo fragrance launch has been very selective. It has been a hit at Selfridges and Harrod's in the UK, and Saks here in the US, as well as at all Jimmy Choo stores. In Europe, for a while we have been the exclusive partner for the Jimmy Choo launch in France, Luxembourg, Monaco, Italy, Portugal, Turkey, Romania, Croatia, and Bulgaria, Poland, and Czech Republic.

As we announced in December, we took over the Boucheron fragrance license at the start of the year. With Boucheron we have aligned our company with a Prestige brand that has been around for over 150 years, best known for trend-setting luxury jewelry. The transfer of the brand inventory is complete, and product shipments are about to commence.

As noted, we have a very important new Burberry fragrance coming to the market later this year. We will tell you more I am sure during our next conference call. New this year at nine stores is a Burberry Sport fragrance called Burberry Sport Ice, which comes in versions for both men and woman. We will also be extending the distribution of Burberry Boutique to about another 30 retail outlets this year, and we've been making new additions to the collection.

Our first fragrance for Montblanc called Legend, a new men's fragrance, will debut this spring. We also have a new Paul Smith fragrance family coming to market later this year. I am very pleased to report that Interparfum Luxury Brands has assumed distribution and related responsibility for Burberry fragrance and cosmetics along with fragrance under the Lanvin, Montblanc, Jimmy Choo brand in the US.

We have an agreement with Clarins fragrance group, which went into effect at the beginning of the year. And Clarins is providing logistical and [strategical] while our two organizations are sharing in managing the next 100 [sales force]. We are working on a number of additional brand partnerships both with US-based specialty retailers as well as with Prestige brand. Of course, there can be no assurance that additional agreements will be signed this year.

One final note before we take your questions. As we noted yesterday, our Board of Directors approved a 23% increase in our quarterly cash dividends to $0.08 per share which brings the annual cash dividend to $0.32 per share. So Operator, I think we can open the floor for questions.

(Operator Instructions)Thank you. Our first question comes from the line of Linda Bolton-Weiser with Caris. Please proceed with your question. Your line is live.

Hi, how are you doing?

Good morning, Linda.

Good morning, Linda.

So, Russ, just to ask you again about the $5.7 million accounting item related to the Clarins joint venture. Are you saying that sales in the quarter was sort of artificially dampened by $5.7 million. And also does that mean that inventory was sort of $5.7 million higher at year end due to that item?

Partially correct. It is at least $5.7 million, because that was the ending inventory that was in the hands of the US distributor at the end of the year. So yes, we recorded a return and we reversed previously recorded sales. That inventory, of course, was then transferred to our subsidiary. All right. And any sales to a subsidiary are eliminated. So that inventory is sitting on our books.

The reason why I say it is at least $5.7 million is that in the ordinary course of any particular year, you would normally -- your pre-existing distributor would have ended the year with inventory, which would not be on your books. That number is probably somewhere between that $5.7 million and maybe $10 million. And that's really the impact on your sales. Did you follow that last part? I just wanted to make sure that it's clear.

-- (multiple speakers)

In other words, our former distributor ended the year with zero inventory. All right? The $5.7 million was treated as a return, but we would not be shipping them inventory in the ordinary course, because they are not going to have any sales come January 2011. That inventory that we normally would have sold to the former distributor and recorded as sale was sold to our subsidiary, and there are no sales recorded for sales to a subsidiary.

Okay. So it is almost like a double hit sort of -- (multiple speakers)

It's not really a double hit. The effect is approximately $10 million.

$10 million, okay, great. Just going forward at 2011, is there any unusual accounting treatments that we should beware or is everything going to be normal with regard to potential joint venture?

Everything should be normal. At the beginning of the year we made sure that we had sufficient inventories at our US subsidiaries so that they can commence shipments to their customers. The only difference going into 2011 is that now for US Prestige fragrance distribution, we will be recording sales at a wholesale price as opposed to mixed factory price. All right? But we have been through this, so it's some improved margins, but we are going to have additional SG&A expenses in connection with those sales.

And it should be, the whole joint venture, should be slightly accretive to EPS in 2011?

Our first year, the expectation is to really to breakeven. I would say slightly accretive to a breakeven situation.

Oh, okay.

With the incremental sale. Of course, as we sell ex-factory to the subsidiary to the extent that we would like a normal margin as we would through a normal distributor. It is the incremental sale from the difference between wholesale and ex-factory that is going to be just slightly accretive or breakeven.

Okay. And then can I just ask you about -- I mean, that is a nice dividend increase you are making. But you still have a lot of cash and short-term investment on the balance sheet and not a lot of debt. So are there further uses of cash you're thinking of in the next year? Are you thinking acquisitions or what exactly?

Everything that -- (multiple speakers)Go ahead, Russ, I'm sorry.

Everything you said is all on the table. Yes, we are looking at potential uses of this cash from acquisitions, new licenses. As we've always said, we wanted to be able to be opportunistic and have the cash available in the event that an opportunity arises. So the answer to that question really has not changed.

Okay. Can I just also ask, I know you do not like to give really detailed guidance or anything, but in thinking about the pattern, by quarter, as we progress for 2011 with earnings, it strikes me that you are going to have maybe easier comparisons and more of the big Burberry launch in the second half. So I would think earnings for us might be stronger in the second half and maybe a little weaker year-over-year growth in the first half. Is that accurate thinking or not?

I think we really have -- as far as the effect on sales with respect to new launches, yes, you are going to have a Burberry launch later in the year and that certainly is going to help make it an easier comparison then. However, we do have a Jimmy Choo launch that is occurring as we speak, all right. That is starting at the very beginning of the year which is doing exceptionally well. We also have a lot of new brands that are in the portfolio. Montblanc didn't exist the first six months of last year. Boucheron is new. So we do not give guidance by quarter, but I think that the sales are going to be spread out relatively evenly with, as usual, a little more of a concentration at the very end of the year.

If I may complete your answer, to give you a better idea of the first quarter, we have launched Jimmy Choo in some important markets, Europe and continental Europe and the US. In the US, we've been exclusive with Saks; and we have been number 1 for our first three weeks after the launch at Saks. We are beating our own internal position by far. And in France, we have been also rated number 1 for the last three weeks, so we are very happy with the initial launch of Jimmy Choo.

And like Russ said, the next very, very important launch will be the second half with Burberry where we will be launching the women's fragrance from Burberry in a major, major way. Maybe it will be -- we think it will be the most ambitious launch of all the Burberry product that we have done from the beginning. So we and Burberry are putting a lot of energy and a lot of hope into this new fragrance, which will come -- we will start shipping, I would say, in September.

Thank you.

Thank you, Linda.

Thank you. Our next question comes from the line of Joe Altobello with Oppenheimer. Please proceed with your question.

Thanks, good morning, guys. I just wanted to chat first on the Burberry cosmetics launch. Russ, what was the impact on EPS ledger. How diluted was that launch?

It is very difficult to quantify, because if you remember as Jean discussed on several past conference calls, that the counters themselves served as an impetus to the fragrance sales. So in locations where we had these counters, we saw an uptick on the fragrance side. I did not quantify it, because the numbers that I was given were not exact.

Originally we went into the year assuming that it would affect our earnings by about $1.5 million or $0.04 or $0.05 a share. I think the number was probably slightly less than that, but I did not have an accurate enough calculation that was worthy of disclosure.

And I would imagine that would be modestly accretive in 2011?

I don't think so.

I don't think so.

Well, a little bit better off than our opposition in terms of P&L. But again, it's costing the Company around $0.03, $0.04, $0.05 a share, something like that. But again, it is helping tremendously in terms of visibility, and from the counters some because we are able to sell fragrances. So at the end of the day, it is difficult to say exactly how much this program is costing the Company because it's part of the whole mix now.

I see. Okay. How many stores are you in now and how many do you expect to be in by the end of this year?

Currently we are in approximately 30 and we've just indicated in the conference call that we are looking to open up at least another 30. So I will go on the hook for 60 by year end. That number could increase as the year continues.

Yes, 60 to 70 by the end of this year.

Okay. Sorry. I missed that. And just going back to the Clarins JV, what have you learned thus far in the first two months of this year, what surprised you positively, and perhaps negatively, switching from P&G to Clarins?

The first question is pretty positive in the sense that now we are able to manage more directly our sales in the US as opposed to before when we were in the hands of the P&G. I think our priorities are different. P&G has a lot of brands that they have under license, Gucci, Dolce & Gabbana; and we are just distributor -- we are thankful for the exposure of [Annette Kevin] to Burberry in the US, but I think it was time to really manage our space and to drive our business more independently from the P&G, who is a competitor.

Got it, okay. Just one last one. You mentioned earlier that given the cash that you've got, you're looking for acquisitions and other licenses. What is the landscape for that in terms of what sellers are potentially looking for in terms of multiples, et cetera, and also the availability of licenses.

Russ, you want to -- ?

Yes, I think as we have kind of indicated, as we've continued to recover from this global economic recession that we all experienced in late 2008 and throughout 2009, I think that there's opportunities out there. I think opportunities increased during that period. And as far as multiples, that really depends on the brand itself. You're going to get completely different multiples if you have a brand that is showing a significant growth as opposed to one that is tired and has declining sales.

In this industry, you can go anywhere from 0.5, 50% of sales to three times sales. The multiples can really run the gamut. But we are seeing some opportunities out there. We are currently in discussion on a couple of different opportunities, both domestically and internationally. I think there is a good chance that some good will come to fruition. Sometimes you don't know where it is going to come from. But as I indicated to Linda, I think it's very important to keep a significant amount of cash on hand so that we can be opportunistic if the opportunity arrives.

Great. Thanks a lot.

Thank you, Joe.

Thank you. Our next question comes from the line of Rommel Dionisio with Wedbush Securities. Please proceed with your question. Your line is live.

Good morning, thank you. Just a quick question on two of your businesses, Van Cleef & Arpels, as well as Lanvin. Could you just update us on how their performance was in Q4 in the holiday season?

I am sorry, can you -- you mumbled. I couldn't understand your question.

All right, Russ.

Speak slower, please.

Sure. With specific regards to Van Cleef & Arpels, and Lanvin, could you just update us on how those brands did in the Q4 in the holiday season?

You want specifically for Q4. We have disclosed in our quarterly reports -- I'm sorry, in the 10-K the annual results. I did not go specifically into just the quarter, but if you give me one second, I will try.

Lanvin did particularly well with sales of over $15 million now. We're very impressive of both in the fourth quarter and in the year. Russ is just searching for the number.

If you want, Rommel, I will call you after the call. I can go through some quarterly numbers, but for the whole year -- (multiple speakers)I'm sorry.

Van Cleef also did very well, because we have also two launches this year for Van Cleef. We have the Oriens and we have the [Midnightingale]. So there were two launches for Van Cleef in 2010. And Lanvin, the launch of Marie, plus the continuing roll out of the [V V C] products of Lanvin are doing posturally well. But we have this closest number from using the 10-K, Russ, right?

Yes, we definitely did. And just to go through some of it, Lanvin for the year ended up with over EUR53 million in local currency. Van Cleef & Arpels reached EUR56 million. And for the quarter -- (multiple speakers)

EUR53 million is like, what, $55 million for Lanvin, which is more -- (multiple speakers)

It is almost $70 million.

$70 million, which is almost three times the sales from the time we acquired this brand. So we are very, very happy. Lanvin, today, the number 2 brand in the Company. And I will remind you that we own trademark for Lanvin; this is not a license. We bought the trademark, so we are very happy to be or to have Lanvin be number 2 in our portfolio.

And then just finally as a percentage, Lanvin fourth quarter was up over 30%. Van Cleef & Arpels was up about 16%.

Great. Thanks very much. That was very helpful.

Thank you.

Thank you, Rommel.

(Operator Instructions) Our next question comes from the line of Alex Fuhrman with Piper Jaffray.

Great, thanks. It sounds like the new Jimmy Choo line is doing very well at Saks. How long is your agreement with Saks, your exclusivity agreement for North America? And then as you think about distribution of the new brands, what are the big factors you are considering in terms of specialty versus department channel and has there been any change lately in the last couple years, any major trend in margin structure between the channels?

About Jimmy Choo, Jimmy Choo expects to be at Saks until summer. We start rolling out to other specialty stores during fall. So we are still going to have selective distribution in the US for Jimmy Choo. We will roll out to department stores at the very, very end of the year or actually into next year, as I see it. As well, I'm very encouraged by the first result that we had at Saks. And the second part of the question was regarding trends between specialty department stores and --

Yes, I'm just curious to see if you are experiencing different sell-through rates through the two channels and how that might differ domestically versus internationally?

No, we have not seen any particular change in the recent months. The specialty stores in the US is doing pretty well. And internationally, we know that there is not specialty stores, because it's more department stores and perfumeries. We are doing a wider partnership with (spoken in foreign language), because Gap, for instance, is sold exclusively in Europe at (spoken in foreign language). Jimmy Choo is sold exclusively at (spoken in foreign language) in 10 countries in Europe for one year. We have an exclusivity agreement with (spoken in foreign language) for one year. So we have seen that specialty stores in the US and the (spoken in foreign language) distribution outside of the US fits very well with our other brands.

Great, that's very helpful, guys. Thanks a lot.

Thank you.

Our next question comes from the line of Eric Hollowaty with Stephens Incorporated.

A couple of quick ones. First, could you give us a sense for what sort of assumption you have with respect to your 2011 sales guidance in thinking about just -- sort of a comp store or like-for-like basis when you strip out the effects of some of your new product launches. Qualitatively, how are you thinking about the consumer environments, particularly in the more developed markets like the US and Western Europe? What is your expectation with respect to how consumers are going to spend?

Well, Jean, I will take the first shot at this. I think when you select Western Europe and the US markets, clearly those have achieved the slowest growth rates in 2010, as compared to 2009, as opposed to markets in the Far East and Eastern Europe and South America. The US is in the low double digits, somewhere around 10% or 11%. Western Europe, probably about the same. Expectations going into next year are very, very similar to that.

Into this year.

I'm sorry, say that again.

Into this year, you meant.

As we move through 2011, the expectation is that those type of growth rates will continue, somewhere in the lower end for the United States and Western Europe and a little bit better in those emerging markets or the markets of Far East and Eastern Europe and South America together.

Right. And that assumes the effect, though, of the introduction of the various products that you have teed up, I would assume. Do you have a sense for whether consumer spending on these products in general is back to where it was to precrisis levels or do you think there is still some pent-up demand there for beauty products like fragrances?

Well, I think -- (multiple speakers)

Yes, go ahead, Russ.

I think it's important to always remember that our sales did not get hit as deeply as other very expensive luxury goods and manufacturers. Fragrance is to the entry price point. As we built up our business to achieve sales this year a $460 million, keep in mind that brought us back to and surpassed where we were two years ago when we reported sales of $440 million for the year ended 12/31/2008. Yes, there are a few additional brands in our portfolio, but I think we were not as affected nearly as much as some other luxury consumer discretionary type products.

I am not sure if there is pent-up demand, but I think there is continuous demand. We are seeing very good sales in many markets around the world. This is one of the first years where we actually saw significant increases in almost every market that we sell to. As we disclosed even in the release, certain markets in the Far East and Eastern Europe -- actually growth rates are 30%, 40%, 50%.

Great.

I will add that in the first 2.5 months of this year, this trend is confirmed. In certain markets it is accelerating.

It's accelerated. Okay, great.

Yes. We are reporting some good sales in the US and good sales in continental Europe, which have been the two markets which have had the slower growth rate. And so we are looking at our guidance with confidence for 2011.

Great. That is great to hear and thanks for the detail. One follow-up, if I could. There is obviously a lot of concern with most investors about rising raw materials costs. You guys seem to be in a very good position to the degree that you outsource most of your manufacturing and do not seem to have significant exposure to several of the more volatile raw materials.

Can you just remind us what the most volatile portion of your cost would be; and on a relative basis, how big your exposure is there. Where it might impact you?

I think the exposure is really minimal. Keep in mind, cost of goods is relatively low. Yes, you can see some minor increases in products that use petroleum products, such as glass and plastics and things of that sort. But when you put the whole product together, you are really talking inconsequential increments if oil continues to rise to the levels that we have seen lately.

Great. Thanks very much, gentlemen, and good luck.

Thank you very much.

Thank you.

Our next question comes from the line of Linda Bolton-Weiser with Caris.

Hi, just a follow-up on the Burberry cosmetics. Just thinking about the industry -- and I cannot think of any successful big color Prestige franchises that are licensed brands. So when you think of Estee Lauder, Lancome, Chanel, these are owned brands that are marketed in the Prestige channels by the companies that own the brands. I am just wondering how this is going to work with Burberry. Do you have to come up with some kind of different business model? It just seems like it is -- (multiple speakers)

But -- (multiple speakers)

Yes, go ahead.

Linda, I think you are absolutely right. And that's why I'm not looking at this segment as something that could be as big as fragrances. Stop me if I'm wrong but the sale of color cosmetics, let's use as an example, may be a 1% or 1.5% of our sales. We are not trying -- (multiple speakers)

Less than 1%.

So less than 1%, so $5 million. So we are not at all looking to build $50 million or $100 million or $150 million business with Burberry cosmetics. We want to be present in the color cosmetics, because it gives the brand a lot to visibility in terms of counters, in terms of space in the store. That is why our rollout has been very slow. We are today in -- we will be at the end of 2011 in 60 stores where as the Burberry fragrance is maybe found in 10,000 stores in the world. So we are not trying to compete with the Lauder or with Lancome or with the Chanel of the world.

Do you think it is possible they could license somebody else to develop the color cosmetics rather than you?

No, I do not think so, because of the way we are using the same models, we are using the same type of advertising for fragrance and cosmetics. I think it would be very difficult. I think that Burberry will have a lot of potential to grow the business in the fragrance, and you will see it when we talk in a couple of months, because it's a little early now and we cannot disclose too much of our plan. But it may be the most ambitious and the most aggressive plan in terms of distribution, in terms of advertising for Burberry we ever have. We have a lot of things to say and to do, into our fragrances. We are not -- the color cosmetic was not a diversification. It was more something to help us get more visibility in stores.

Great. Thanks very much.

Thank you.

Thank you. There are no further questions at this time. I would like to turn the floor back over to you both for any closing comments that you may have.

Thank you. And again, thank you to all for your participation in this conference call, whether you were live on the call or listening through our webcast. As always, if any of you have any additional questions, I'm always trying to make myself available by phone. Have a great day and thank you again for joining us.

Ladies and gentlemen, this does conclude today's conference.