Interparfums Inc (IPAR) 2011 Q1 法說會逐字稿

Greetings, and welcome to the Inter Parfums Incorporated first-quarter conference call. At this time, all participants are a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded. And now, I will turn the call over to Russell Greenberg, Executive Vice President and Chief Financial Officer for Inter Parfums, Incorporated. Thank you, sir. You may begin.

Thank you, operator. Good morning, everybody, and welcome to our 2011 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' 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 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, which is based here in New York. The three months ended March 31st, 2011, set a first-quarter record for Inter Parfums. Net sales were $133.4 million, up 11.7% from $119.4 million. At comparable foreign currency exchange rates, net sales rose 11.6% for the period. European-based operations generated sales of $121.6 million, a 12.3% increase compared to $108.3 million. Sales by US-based operations were $11.8 million, up 6.5% from $11.1 million. Gross margin increased to 64.9%, compared to 60.1%.

SG&A expenses as a percentage of sales was 45.8%, compared to 46.7%. Net income attributable to Inter Parfums, Inc. increased 95% to $12.8 million, as compared to $6.6 million, and diluted earnings per share increased 87% went to $0.41 from $0.22. To simplify this discussion, for European-based operations, when I refer to percentage sales changes, I am talking about increases and decreases in local currency.

As we reported, our first quarter sales growth was primarily due to the January 1st, 2011, commencement of Prestige product distribution in the United States, by our subsidiary, Interparfums Luxury Brands. Additionally, Lanvin turned in a 35% increase in brand sales, all the more impressive in the absence of a major new product launch. Other reasons for the increase are, initial sales of our Jimmy Choo signature fragrance and the inclusion of Montblanc fragrances, which wasn't under license to us in the first quarter of 2010. We also launched Montblanc Legend, a new men's fragrance, during the first quarter of 2011.

Those of you who have been following our business for any length of time know that Burberry in the largest brand in our portfolio, so when we say that Burberry brand sales were only off 8% in local currency, and were in line with our expectations, keep in mind that Burberry sales were up 25% in the first quarter of 2010 versus 2009, due in great part to the launch of Burberry Sport in that period. Similarly, Van Cleef & Arpels sales surged 55% in last year's first quarter, from the first quarter of 2009, with much of the gain attributable to the launch of Oriens, making the 19% decline in current first-quarter sales quite understandable.

With regards to factors impacting profitability, selling prestige products in the United States direct to retailers, rather than through a third-party distributor accounted for most of the gross margin improvement. Advertising and promotion, including in SG&A expenses, approximated $18.3 million or 13.7% of net sales in the current first quarter, down from $19 million or 15.9% of net sales in the comparable 2010 period. With planned promotion and advertising activities heavily weighted towards the second half of the year, those expenses, in both dollars and as a percentage of net sales, should be substantially higher in the second half of 2011. Furthermore, all promotion and advertising expenses associated with prestige products sold in the United States this year have been and will be borne by our US distribution subsidiary. In previous years, they were shared with our former third-party distributor.

Royalty expense included in SG&A aggregated $11.5 million or 8.6% of net sales, compared with $11.2 million or 9.4% of net sales for the first quarter of 2010. Comparable quarter royalty expense as a percentage of sales should continue to remain below last year. Again, as a result of selling prestige products direct to retailers in the United States. Finally, in the current first quarter, we recognized a $0.4 million foreign currency gain, while in the prior-year period we recognized a foreign currency loss of $2.4 million. We've continued to maintain a very strong balance sheet and liquidity.

At the close of the first quarter, cash and cash equivalents and short-term investments aggregated $84 million, and working capital aggregated $208 million for a working capital ratio of 2.3 to 1. Long-term debt, less current portion, was only $3.6 million, down from $5 million at 2010-year end. Inventory levels at March 31st were $141.8 million, or about $25.3 million more than at 2010-year end, which reflects the needed inventory build to support sales growth and upcoming product launches.

Before turning the call over to Jean, as stated in our press release, we reaffirm our recently-raised 2011 guidance, assuming the dollar remains at current levels, we expect net sales of approximately $550 million with resulting net income attributable to Inter Parfums, Inc. of $32.5 million, or $1.05 per diluted share, making 2011 another record year. Jean, please continue.

Thank you, Russ, and good afternoon, everyone. We appreciate your participation on today's conference call. One of the highlights of the first quarter was, in the US, our agreement with Lane Bryant, the nation's leading women's specialty full-figured apparel retailer. Lane Bryant has more than 100 years of history, and today, there are approximately 750 Lane Bryant stores. Our initial collection of performance-based body care products are being sold under Lane Bryant's Cacique brand name, and include seven different products that each come in four scents. The line will include also a lip gloss collection and will be launched at 150 Lane Bryant stores in late spring, with chain-wide rollout anticipated in early 2012. Additional products and a fine fragrance are under consideration for holiday 2011.

During our year-end quarter conference call and again in yesterday's news release, we discussed first-quarter product launches so I think that subject has been covered. But if there are questions later, of course we'll answer. To highlight plans for the balance of the year, we have a new BB scent called Gold, coming to domestic stores in late summer. Domestic distribution will include domestic specialty and department store and international distribution will follow. This will be the third BB fragrance in three years.

For Nine West and Betsey Johnson, our new scents are due out in their respective stores, as well as other department stores for holiday 2011. We plan to roll out Nine West and Betsey Johnson scents early next year. Given the limited initial distribution, the Jimmy Choo fragrance launch has been doing extremely well at retail. With unexpectedly-high reorder levels. We have been increasing production accordingly, especially in light of the rollout to a much broader retail network, including stores throughout much of Europe.

As we announced in December, we took our Boucheron fragrance at the start of the year and we are now giving up sales of the legacy fragrance as we ready the new scent for 2013. Our new Paul Smith fragrance family is called Optimistic, which includes scents for men and women. We also have a scent for Van Cleef & Arpels and Lanvin coming to the market. Our two suite of additional licensing and specialty retail continuity continues.

We are looking for great brands, with significant upside potential. Our search includes brands which have been under served by their current licensee, as well as fragrance offerings. We have been able to form partnerships with most exclusive luxury brands in high fashion and jewelry, with glamour brands, with classic brands, and with popular prestige names, and we are ready for new opportunities. We have the financial strength and flexibility, talent on both sides of the Atlantic, infrastructure and distribution, and the reflexes to move quickly. While there can be no certainty that any of these will be consummated, we are pursuing new brands, and hope to announce very soon, additional prestige and specialty retail agreements in the coming year.

We'll be presenting at two upcoming investment conferences, the Stephens Annual Spring Investor Conference on May 24, and Piper Jaffray Consumer Conference on June 6. Both are in New York. And we hope to see you soon there. Russ, if you want to open the floor for questions.

Yes, operator, you can now open the floor for third-party questions.

Thank you. (Operator Instructions). One moment please while we pause for questions. Our first question comes from Linda Bolton-Weiser with Caris. Please state your question.

Hi. Is there any way that you can quantify how much the distribution subsidiary formation boosted the sales growth in the quarter?

Unfortunately that is not disclosed.

But you did --

We indicated how much North American sales were up when we announced our sales release, Linda. But to go into that kind of detail, we're not prepared to do that.

Would North America have been up, excluding that factor?

You're asking the same question in a different way. I'm sorry, Linda, but we're not prepared during this call to discuss that.

Okay. So you pointed out that the royalty expense would still be down as a percentage of sales, I guess, even through the whole year. But would the Burberry launch in the second half, would the reduction in the royalty expense ratio be less than the reduction we're seeing now?

Well, the main reason for the royalty deduction is, keep in mind that for the largest brand in our portfolio, which is Burberry, our royalty is paid based on wholesale sales. So the fact is that, based on the North American sales, it's the exact same royalty that would go to Burberry, whether we're selling direct to retailers or if a third-party distributor was selling direct to retailers.

So a percentage of sales of the royalty is lower, but the dollar amount is the same. Right, Russ?

That's exactly right.

Okay. Got you. And then the Montblanc, it seems like it's higher than I thought it was and you said you launched a new fragrance there. Is that going to be a $40 million annual sales business or is that too optimistic?

We don't know.

Go ahead, Jean.

With Montblanc, we have some good surprise. We're back in inventory, and we have been able to sell the classic fragrance. And the launch of Legend started very recently. So $40 million this year, we could maybe reach this number. I think $30 million to high $40 million. Or we are definitely reaching this kind of number, over the next 18 months is possible.

Okay. And then can I just ask one thing about Burberry. Do you know will the shipments of the big launch be in September? Will a little bit come in third quarter or is that launch all going to ship in fourth quarter and can you give us any color on what the positioning of the new fragrance will be?

I can try. The launch will happen in the third quarter, so we'll see some definitely some surge in the third quarter. We roll out between second and fourth. In terms of positioning, the price point is higher than the latest fragrance. And for us it will be the biggest launch ever for Burberry in terms of distribution, because we're going to be -- we're not going to give any exclusivity to any store. We're going to launch many doors at the same time. And we have increased our budgets of advertising and promotion in order to have major visibility for this launch.

Thank you.

Thank you.

Thank you, Linda.

Thank you. Our next question comes from Eric Hollowaty with Stephens. Please state your question.

Good afternoon, gentlemen. Following up on Jimmy Choo, I would love if you could give us any more specific color on the time line of the rollout for the balance of the year. As I recall, the exclusivity on the Sephora stores in Europe as well as Saks in the US ends, I think, in late June. If you could maybe verify that, and then talk about how you see the rollout happening through the balance of the year, and if applicable, going into 2012. That would be great.

I can answer this question. We are doing -- in the US we are doing very, very well with Saks Fifth Avenue. So Saks will be an important player until we rollout our specialty store. The rollout could happen a little bit later. Maybe July, or August, or September. We have not finalized the plans yet in the US, but definitely, we'll have more than Saks before the end of the year. And outside of the US, if you are looking at Europe, giving us large coverage with a large amount of stores in Europe. So we in Europe until the end of the year.

What is important to notice on Jimmy Choo is very, very high sell-through. That's why we were surprised and taken by surprise and we have some issues in inventory, which we are fixing. So we should be able to put more merchandise before the summer in the stores. So we're very happy with the sell-through, the response from the consumer from the fragrance point of view. From the smell point of view, and also from the name recognition point of view. It's very positive. So we are going to definitely be the numbers that we have in our estimates for Jimmy Choo.

The only thing that I would add to that and the difficulty we have in assessing exact times is that the exclusivity period started at different times in different countries, and the exclusivity period runs for a different duration in different countries. That's why it's a little bit difficult to indicate precisely exactly when the exclusivity period ends and full distribution will begin. But certainly as we approach third quarter and into fourth quarter, it will be in full distribution.

Great. Thanks very much, Russ and Jean.

Thank you.

Thank you.

Thank you.

(Operator Instructions). Our next question comes from Henry Caplan with Oppenheimer. Please state your question.

Hi. Yes. Thanks for taking my questions . Just wanted to ask about the Lanvin brand and what drove the strength there, considering that there was no new product launch in the quarter?

I think Lanvin has great visibility because the fashion doing very well and I've heard in the Middle East, Far East, China and Japan fashion, his been getting stronger. Our sales are moving up quickly. So this is one of the explanations of why we're doing so well with Lanvin without having a specific new product for this quarter. Russ, do you want to add something?

Yes. I agree with everything that Jean said. The reality is, we had a very nice launch for Lanvin the middle of last year. So that particular product did not exist in the first quarter of last year, so it made the comparison a little easier. But I think that it is really -- it's one of those brands that were a sleeper brand for a while, and now as a result of the visibility that it's getting on the fashion side, that it's following through into the fragrance side. And I think it's becoming, for us, one of the most successful acquisitions we've ever made. Lanvin sales in the first quarter 2011, at EUR14 million, up 35% from the prior year, clearly has demonstrated that it is exceeding all of our expectations.

So Lanvin is definitely the second brand of the Company after Burberry and is growing at a very fast rate.

Absolutely.

So I guess trying to tie that back into the guidance for the year, which was unchanged, it sounded like Lanvin did better than expected. Jimmy Choo is trending better than expected. But yet the sales and earnings guidance was unchanged. And I guess if I do kind of a calculation here, it implies sort of a 3% decline in earnings per share for the rest of the year. So I'm just trying to figure out what the offset to Lanvin and Jimmy Choo are, in terms of how you think about the guidance.

Well, the reality is we preannounced sales just a couple of weeks ago at the end of April. And when we preannounced sales, we increased our guidance from $525 million of sales to $550 million in sales.

Right.

So to say that we haven't changed guidance, at that point in time, we saw what Jimmy Choo was doing. We saw the results of Lanvin, and that was part of what went into the increase in the guidance then. We felt, why should we wait until we announce earnings? So that was basically preannounced just a couple of weeks ago.

At this point in time, as we said in our release, and as I tried to say in my remarks before we started, no major product launches, meaning Burberry product launch is earmarked towards the end of the year. Most of the other launches for our domestic specialty retail businesses is earmarked towards the end of the year. And of most of the major advertising programs that we are putting into place are going to happen in the second half of 2011.

When you think about it and combine those facts with the fact that we've taken over the distribution here in the United States and, therefore, we have a bump up in sales because we are shipping at a wholesale rate as opposed to an ex-factory rate, we really haven't spent the dollars to market yet, because we don't have any new major launches here in the United States. So that's all going to happen in the second half of the year. And that's what we have built into our earnings guidance. But keep in mind we just -- two weeks ago, less than 15 days ago, we increased our sales guidance. We increased the earnings guidance from $0.98 to $1.05.

Right.

All right. Net income from $30 million to $32.5 million.

So you're saying --

We cannot change our guidance every two weeks.

Right. No, no. Okay. So what you're saying is these positives were incorporated into what you announced a couple weeks ago?

Absolutely. And if the trend continues, and we continue to outpace our own internal budgets, we'll revise our guidance as appropriate. But as of right now, we're reaffirming the guidance that we have just recently raised 15 days ago.

Got it. And then I guess just the last question, in terms of the gross margin, obviously was significantly strong in the quarter, I know that's related to the new distribution agreement structure that you have. How should we think about that for the rest of the year? Should we expect a similar bump up in gross margin, as you had in the first quarter, or will that change throughout the course of the year?

Well, certainly it's going to vary a little bit based upon the increase in sales here in the United States, as compared to that of the prior year. When we made the announcement today and again in the remarks, the increase of almost 4%, almost 5% is primarily the effect of the US distribution. There is a little bit that is also related to some product mix. Prestige product sales grew faster than specialty retail and mass market. That also adds a little bit, albeit not nearly as much as taking over the US distribution.

In addition, certain of our brands, we do achieve a little bit of a better gross margin than we do on other brands. It's those that grew most during this particular quarter, that caused that gross margin improvement to be as high as it was. I think it's still going to be better. Certainly compared to last year as the year goes on. Will it maintain a 4% to 5% increase? I don't think it's going to be quite that high for the remainder of the year.

But I think it's safe to say that our gross margins will be north of 60%.

Oh, absolutely.

But our advertising and promotion was, I think, around fourth quarter 14% where not more than 16% or sometimes 17%, when we are in the launch mode. And I expect to have a higher number than 14% in the third and fourth quarter.

And just getting back to that, when you say 16%, 17% in the launch mode, that is not adjusting for the fact that you now have to bear all of the increase?

That's correct. That is not adjusting. Jean was comparing it to historic trends, which during a year with a Burberry launch could actually even approach 18%.

Absolutely.

Let's keep it in perspective. So that's on a historic basis. And I would expect those numbers to be higher now that we've taken over the US distribution.

Okay. Thank you very much.

Thanks.

Our next question comes from Linda Bolton-Weiser with Caris. Please state your question.

Yes. I was just wondering about your new arrangement with Lane Bryant to market body care products and lip gloss. It sounds a lot like the product line you originally launched for the Gap several years ago, and of course, that line at Gap has whittled down quite a bit now. What were the learnings that you had from that experience that is going to hopefully make the Lane Bryant Body Care line more successful?

I would say two things are important. The first thing is, this line is not just another body lotion or another whatever. It's performance-based. So we went to labs and developed a performance formula. So these products are quite special. The price point is also a little bit higher than the Gap one. And the support that Lane Bryant will put in the stores in terms of merchandising will be quite high. So, again, we're going to start slowly in 150 doors this year, and we will roll out end of this year beginning of next to their whole 750 doors. We have some high expectations, especially with rollout. Especially with 2012 sales for Lane Bryant.

Great. Thanks a lot.

Thank you.

Thank you, Linda.

Our next question comes from Eric Hollowaty with Stephens. Please state your question.

Yes. Just hopefully two quick follow-ups here. Jean Madar, in your prepared comments I believe you referenced that while of course it's not certain, you would hope that you would be announcing at least one new license in the specialty retailer prestige area. Did you say that was with respect to the end of this year that you hoped to make that sort of announcement?

We've been working on the many different deals, so there is no guarantee that it will come through. But it is a possibility, of course, that we make some announcements. The good thing is that the Company has now a very good name recognition in the marketplace, so we are receiving many phone calls of brand or specialty store chains asking us to share some ideas of how we can be in business. So we hope that we'll be able to finalize one, maybe two of them quickly.

Great. That's helpful. Thank you. And, Russ, maybe this is a better question for you, but can you help us understand, as far as your Burberry license agreement goes, it's our understanding that one of the provisions is that you spend a certain amount as a percentage of sales to support advertising and promotion. Is that amount fixed at the beginning of each year based on projections that you share with Burberry, or is it more of a moving target to the degree that, let's say if your fall launch of the new women's fragrance turns out to be doing much better than expected, would you then be obligated to in realtime ramp up your advertising spend accordingly? If you could shed any light on that, that would be okay.

That's okay. I understand your question. Realistically, this number, this magic number, if you will, is a minimum number for spending. It's a percentage of sales. So therefore it is a moving target because it does run along with sales.

It also varies in years where there is a new product launch. The percentage is higher in a year where you're going to have a new product launch versus if you're just anniversarying fragrances that had been launched over a year ago or six months ago. So it is a moving target. It is based on the actual sales dollar volumes. But it is a minimum. Historically as with most of our licenses, we probably spend well in excess of what the minimum requirement is. So I hope that sheds light on your question.

It does. Thanks a lot, Russ.

No problem.

Thank you both.

Ladies and gentlemen, we have no further questions at this time. I'll turn the conference back to management for closing remarks. Thank you.

Thank you, operator . Again thank you, everybody, for your participation on this conference call, whether you are on the call live or listening via our webcast. If you do have additional questions, as usual, I am always available by phone. Thank you, and have a great afternoon.

Thank you. Ladies and gentlemen, this concludes today's conference. All parties may now disconnect. Have a great day.