Interparfums Inc (IPAR) 2011 Q2 法說會逐字稿

Greetings, and welcome to the Inter Parfums, Inc second-quarter 2011 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. It is now my pleasure to introduce your host, Russell Greenberg, Chief Financial Officer and Executive Vice President for Inter Parfums. Thank you. You may begin.

Thank you, Operator. Good morning, everybody, and welcome to our 2011 second-quarter conference call. Following the financial review, I will turn the call over to Jean Madar, Chairman and CEO of Inter Parfums, who will highlight our launch plans for the second half and update you on recent activities. 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 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 through our 74% owned French subsidiary, Inter Parfums SA. When we discuss our United States operations, we are generally referring to sales of specialty retail, mass-market products, and more recently, US designer fragrances sold through subsidiaries which are based here in New York.

Now, some highlights of our second-quarter results -- net sales increased 12.3% to $121.1 million, from $107.8 million. At comparable foreign currency exchange rates, net sales rose 4.7% for the period. European-based operations generated sales of $106.5 million, up 15.9% from $91.9 million. Sales by US-based operations were $14.6 million, down 8.2% from $15.9 million. Gross margin was 61.9%, compared to 60.1%.

SG&A expense, as a percentage of sales, was 53%, compared to 49.4%. Operating margins declined to 9% of net sales, from 10.7% of net sales. Net income attributable to Inter Parfums, Inc decreased 6.8% to $5 million, as compared to $5.4 million. And basic and diluted earnings per share was $0.16, down from $0.18. Thus, for first half of 2011, net sales were $254.4 million, or 12% ahead of $227.1 million in the first half of 2010.

At comparable foreign currency exchange rates, net sales rose approximately 8%. Net income attributable to Inter Parfums, Inc increased 49% to $17.8 million, or $0.58 per basic and diluted share, from $11.9 million, or $0.39 per basic and diluted share, for the 2010 period. Although second-quarter net sales by European-based operations was 16% ahead of last year, they fell short of our expectations.

As we reported in June, we opened a new, 340,000 square-foot distribution center in the outskirts of Paris. While the move to this new facility went fairly well, it was not without its share of unplanned transitional issues, causing certain shipments that were scheduled to ship in the second quarter to be delayed until the third quarter. As a result, sales for the period were below our expectations, and, therefore, we did not achieve the leverage of fixed SG&A expenses in the current second quarter that we would have otherwise achieved.

As we reported yesterday, the second-quarter increase in sales by our European-based business is due to a number of factors, including the commencement in January 2011 of prestige product distribution in the United States by Inter Parfums' luxury brands, a subsidiary of our French subsidiary, Inter Parfums SA. Also, Jimmy Choo and Montblanc products were not part of our 2010 first-half sales mix, and both brands launched new products early this year. These sales gains were partially mitigated by anticipated sales declines in Burberry and Van Cleef & Arpels brand sales, which benefited by new product launches in the corresponding period of the prior year.

Moving on to sales by US-based operations, after a 6.5% comparable quarterly gain in sales in the first quarter, second-quarter sales came in at $14.6 million, off modestly from $15.9 million in the corresponding period of the prior year. Most of our new specialty retail product introductions and holiday programs for most of our brands are scheduled to ship in the second half of 2011. The gain in second-quarter gross margin was primarily the result of us taking over our European operations' prestige product distribution in the United States, which I referred to earlier.

Those gross margin gains were offset somewhat by the negative impact of a weaker US dollar versus the euro. The average euro-to-dollar exchange rate in the current second quarter was 1.44, as compared to 1.27 for the second quarter of 2010. If not for such effect, gross margin would have been more comparable to that achieved during the first quarter of this year.

Promotion and advertising expense included in SG&A as a percent of net sales was 19% for both the current and prior year's second quarter. In the first half of 2011, there were no global launches, and accordingly, our advertising and promotion expenditures were relatively low. As we have said before, our plans call for a significant portion of our annual advertising budget to be incurred during the second half of 2011.

Once again, I will remind listeners that all promotional and advertising expenses associated with our European operations' prestige products sold here now in the United States are borne by us. In previous years, such expenditures were shared with our former third-party distributor.

We've continued to maintain a very strong balance sheet and liquidity. At the close of the second quarter, cash and cash equivalents and short-term investments aggregated $53 million. Working capital aggregated $209 million, for a working capital ratio of almost 2.4 to 1. Long-term debt, less current portion, was just under $2 million, down from $3.6 million at the start of the second quarter and down from $5 million at 2010 year end.

Inventory levels at June 30 were $176 million, or about $34.5 million more than at March 31. You will understand why when Jean discusses what is in the works for the second half of this year. Finally, once again, we affirm our 2011 guidance. Assuming the dollar remains at current levels, we expect sales of approximately $550 million, resulting in net income attributable to Inter Parfums, Inc of approximately $32.5 million, or $1.05 per diluted share.

Jean, please continue.

Thank you, Russ. And good morning, everyone. We appreciate your participation on today's conference call. Our second-quarter sales and earnings releases provided another view of product activity and launches during this reporting period. So, I would rather devote this time to launches, new developments, and new directions on both sides of the Atlantic, starting with the largest brand in our portfolio -- Burberry. Very shortly, Burberry Body will be coming to the market in the largest global Burberry fragrance launch in history. I suggest you go on Burberry Body for a preview of the initial and quite daring ad campaign, featuring actress and model Rosie Huntington-Whiteley, star of Transformers 3.

Unlike most of our previous Burberry product introductions, which I would characterize as measured rollouts, Burberry Body will be in 120 country global [reach]. During the first-quarter conference call, we mentioned that [advance of a] Jimmy Choo signature fragrance, even while in limited distribution, exceeded expectations. Jimmy Choo is still exceeding expectations, and the fragrance is now rolling out to wider distribution, including Sephora stores in Europe, and supply is less of an issue.

Moving on to new business initiatives -- in early July, Inter Parfums SA signed a 12-year worldwide license agreement that starts on January 1, 2012 to create, produce, and distribute perfumes under the Balmain brand. Balmain couture house was founded in 1945, and in recent years, the label has been reinvigorated and transformed and is becoming a major trendsetter. I think we have got another interesting possibility with a comeback brand, a brand that is enjoying a renaissance. Initially, we will take over production and sale of existing Balmain fragrances, and in 2013 we will launch a new scent.

We have had some experience with a brand renaissance model, [let that be] Lanvin, a very old brand that was revived under new management and a superstar designer. From the time of our initial agreement with the brand in 2004, Lanvin's fragrances have grown many times over into what is now our second-largest brand. In recent weeks, our US operations signed a 10-year exclusive worldwide fragrance license agreement with Anna Sui for perfume and fragrance-related products under the brand.

This agreement also will commence on January 1, and for starters, we'll take over production and distribution of the brand's existing fragrance collection. We currently plan to launch a new women's scent in the fall of 2012. The Anna Sui brand is feminine and girly, with a touch of nostalgia, hipness, and rock-and-roll. Although Anna Sui is an American designer, her customer base is exceptionally strong in Asia. We plan to grow the fragrance franchise by developing new products and extending the brand's fragrance presence in North America, Europe, and the Middle East.

This brings me to a discussion of a new dimension to our US-based operations. From a business center and creating products for sale in domestic Gap and Banana Republic stores, this efficiency we have initiated has grown on many fronts. We added many other retail partners, for one. We have also established licensing agreements, enabling us to sell products created for our retail partners overseas to [a network of] retailers. In certain cases, for example, our license for bebe, Betsey Johnson, and Nine West permits the sale of fragrances [in the US] to department stores and other specialty stores.

In various pieces of our [world] US-based operations, we are moving closer to the prestige fragrance model. We intend to take the designer brands well beyond (inaudible) store. For example, we have a Betsey Johnson fragrance launch; the product will also be available in US Sephora stores.

Finally, last month we renewed our exclusive agreement with the Gap, Inc., for fragrances for Gap and Banana Republic, covering products sold in their stores in the US and Canada, and the license agreement for international distribution. This new agreement will run through the end of 2014.

Just a few more odds and ends, and of course after that we will answer your questions. In June, Inter Parfums was added to the S&P SmallCap 600 index. In May, we took home the Fragrance of the Year award at The Fragrance Foundation FiFi gala, for the Republic of Men Essence by Banana Republic. And just recently, we learned that the product called Happ & Stahns Rosa Alba, which we created exclusively for Anthropologie, won the 2011 HBA Packaging Design Award in the prestige fragrance category.

So, thank you for your participation on our call. And Operator, can you please open the floor for questions?

Thank you. Ladies and gentlemen, at this time, I would like to conduct our question-and-answer session. (Operator Instructions) Linda Bolton-Weiser, Caris & Company.

Can you maybe help us understand the leverage a little bit that's going on in the SG&A line? Because -- maybe you could try to quantify in some way for us the additional investment that's required to establish the distribution joint venture. Or can you talk about if there are certain FX impacts on the SG&A? Because the thing that's a little strange is that you have sales growth, even though it was less than expected, you have sales growth -- in which case, I would expect the year over year change in the SG&A ratio. And I'm excluding advertising and royalties. I'm just talking about the other piece of SG&A. I would expect there to be, still, a little bit lower of a ratio. So, is there any numbers you can provide that would help us analyze that a little bit better?

Well, it's very difficult to specifically go into all the different detail of all the different fixed expenses. But just to try to put a little bit of flavor into what you are asking -- during the quarter, as we said, there was, at least from our initial expectations, a shortfall in the sales line. And it's also very difficult to quantify exactly what that number is, because during any cut-off period, you may have certain sales, that although it might be even in your backlog or expected to shift, you might not be able to record the sales, due to cut-off restraints and things of that sort. But needless to say, there was clearly a certain amount of sales that did not get recorded. And it's not even just all the fixed expenses that we lost a little bit of the leverage, but even with respect to some of the advertising.

As we see, the promotional line came in at about 19%, which is very comparable to that of the prior year. We would have normally expected that number to be lower during this particular second quarter, based upon our previous announced global launches that we have coming in, in the second half. And we have already indicated that we are going to be spending a lot more on promotional advertising in the second half of 2011 than we did in the first half. So, you know, you basically have an overall business that you are running, with a certain expectation of a sales dollar. The fact that that sales dollar did not come in is clearly the reason why the SG&A line, as a percentage of sales, was higher than we would have expected, as well.

Yes, now that I look at it a little more closely, actually I'm seeing that, if I have this right, in a dollar amount, it actually was flat sequentially. It was $31 million for SG&A, excluding advertising and promo and royalties. So, it actually didn't go up in a dollar amount, sequentially. So, I guess that makes sense, what you are saying.

Thank you.

Can you talk a little bit more about the -- I missed what you said about the gross margin. Did you say it was just FX that made the gross margin go down sequentially from the first to the second quarter?

No, what I said is that the primary reason for the gross margin increase is similar to that of the prior quarter, which is the takeover of the US distribution for our European-based business. I also indicated that it was mitigated somewhat by the FX effect. The reality is, is the strength of the euro during that particular period, $1.44 compared to $1.27, probably shaved off approximately 1% off of our expected gross margin. So, we would have gone up by about 3 points, maybe a little bit higher when you add in product mix. And then, that was offset by approximately 1%, to bring it down to a little -- to just about a 2% gain for the period.

Thank you. That's very helpful.

Eric Hollowaty, Stephens.

Russ, going back to when this question on the SG&A in the quarter -- is it possible to call out any incremental, one-time expenses that you incurred related to the D.C. transition?

Clearly, there are some expenses, of course, in connection with the D.C. transition. Clearly, if my numbers are correct, I know we had 600 trucks of product moving from one location to another. But these are expenditures that we would have anticipated, we have kind of built into our model with respect to -- those were pretty much known expenses. So, I don't really want to look at that as one-time charges or things like that. It's built into our model. When you look at the overall Company and the overall expenditure model, those numbers are really not as significant as one might say. So, I don't want to blame it on anything in particular. But, yes -- certainly, there were some incremental dollars in connection with the move.

Okay, great. That's helpful. And on the D.C. transition, how are you feeling about resolution of the issues that you encountered? And are things operating normally to this point?

I will answer to that, because we are looking at this on an hourly basis. The situation is improving from end of June to now. We are still not -- we have a huge backlog of orders that we have to ship during the month of August and September, for the launch of Body. But things are much better than they were 1.5 months ago.

Okay, great. And, Russ, did you guys incur any advertising expenses for Burberry Body in the second quarter? Or should we think about those being allocated strictly to the back half?

The advertising program for Burberry Body is clearly lined up for the second half of the year. Expenditures that might have been incurred would have been insignificant. Most of the advertising expenditures that we had were for the existing launches that we were currently running, which was Jimmy Choo and Legend from Montblanc.

Okay, great.

Plus, keep in mind that ongoing, there is a certain dollar amount of advertising spending that we are doing naturally, just automatically, even in connection with predecessor brands, in connection with Burberry and every -- all of our brands, actually.

Of course.

So, yes, you're going to do a national campaign blitz when you're going to do a product launch, but it doesn't mean you don't advertise anything. We spent 19% of our sales in advertising during this particular quarter.

Right. And one more, if I could. I couldn't help but noticing in your 10-Q that with reference to the Burberry Beauty distribution, it sounds like you guys may be seeing a lot more potential for that this year, and are indicating that you could be looking at as many as an additional 60 stores year over year, versus your original expectation of 30. Could you just maybe talk about the drivers of that decision, and help us understand what's factored into your guidance currently? And is there ability in the event that the consumer environment materially worsens over the balance of this year and into early next year -- is it too late to change those plans, in the event that you need to pull some of those investments back? Because as I understand it, it is a drag, at least initially on earnings, as you ramp the resources needed to get those outlets going.

You are correct, it is expensive in order to open these doors. But let's keep it in perspective. Whether it's 30 doors or 60 doors, all right? Or a total now of 90 doors, it is still very much a very small, very insignificant portion of the overall business. We want to try to get enough penetration so that we can really make an evaluation as to what the potential for this business is. The initial 30 stores gave us a certain amount of information. Our decision early in the year to go into an additional 30, and our decision later on to now move that into 60, is really to give us a little bit more visibility in connection with where we think this brand can go and how much of an investment we want to make in the future.

Okay, great. And is -- what's currently incorporated into the guidance, in terms of the number of doors? Is the 60 still incorporated into your [maintenance CapEx]?

In our guidance, we are still -- yes, going into an additional 30 doors for the second half of 2011 is really not going to move the needle, if you will, from our guidance standpoint. We think we will be able to absorb the incremental expenses of opening the additional 30 doors, and we don't really see a huge -- a movement, if you will, on the needle with respect to sales.

Okay, great. Thanks very much. I'll get back in the queue.

Christina Metcalf, Oppenheimer.

I was just wondering if could you tell me what you think the inventory drawdown is going to be in the second half, and where we should expect it at the end of the year?

Yes. Well, clearly the ramp-up of inventory, as we mentioned in the comments before we opened the floor to questions, is not unexpected. We have a significant new product launch, new product launches going on, on both sides of the Atlantic. Clearly, one of the biggest drivers is of course, the Burberry Body launch. A good portion of this inventory increase is, in fact, that Burberry Body launch.

Normally, as we move towards the year, I think that the inventory at the end of the third quarter is going to be slightly lower than it is today. But clearly, as we move towards the end of the year, that December 30 period is always the period where our inventories are usually the lowest they are during the course of the year. To come up with an exact number, it really all depends on what the drivers of our sales are going to be. But do I expect the inventories at the end of the year to be at the lowest levels of any period during 2011.

Okay, great. Thank you.

(Operator Instructions) Alex Fuhrman, Piper Jaffray.

Just wondering if you can talk a little bit about how many points of distribution we should expect to see for the Burberry Body launch you have going on, and when we could reasonably expect to start seeing some replenishment orders coming in for that? And then, bigger picture, when you launch a brand extension like this with another Burberry launch, what do you typically see with your other Burberry fragrances, when you have a big high-profile launch with this? And switching gears to what you have been talking about the last few quarters, about being able to sell some of your specialty branded fragrances through some other channels -- curious to what kind of reaction you are getting from your distribution partners, in terms of their willingness to sell a brand like bebe, as opposed to some of your more established, bigger brands.

Let's start with Burberry Body. Burberry Body will be, like we said before, will be launched in all the countries where Burberry has been in. So, (inaudible). It will be local market and duty free at the same time. This is the first time that we are doing such a push. What kind of impact are we looking to have from this launch of Body to the other fragrances of Burberry? Usually, there is significant evaluation, which has been taken into account in our world numbers. But [additionally], our world Burberry number will be much higher this year than last year. Your question on replenishment -- we are going to ship -- the selling is going to be very reasonable. We have -- we are making -- so, we will have enough inventory to ensure replenishment. We are expecting to start replenishing world distributors and retailers and duty-free operators, starting October.

So, we are, as we speak, we are shipping the first orders to our worldwide distributors. Launch will happen in less than 4 weeks, and we are going to monitor sales worldwide. We will have inventory to achieve the numbers which we are forecasting. Regarding the over -- the specialty store business in the US, it's very interesting that a chain like Sephora was interested to carry a brand like Betsey Johnson. And so, we think that there is a life outside of the stores, of our specialty stores, Sephora being one of them. We are also seeing some interesting demand for Nine West, which will be launched next year in the Nine West stores and also in department stores. So, this is quite new and interesting for us. I hope I answered your questions. But if you have more, I will answer.

You did, thank you. That's very helpful. And good luck.

Thank you.

Valerie Brown, Alliance Bernstein.

I have a question about the distribution center in France, and also what kinds of business processes and technology you are deploying as you switch to the new distribution center. Could you give some more color on that, with respect to any new systems or technologies that are being deployed to make your distribution more efficient?

That's actually an excellent question. In addition to the -- to moving over to a new distribution center for the European operations, we have also just completed a complete -- I'll call it rework of our computer systems. We actually engaged SAP, which went live during the quarter. I really didn't concentrate too much on it from the standpoint of -- in the press release or in the Q, although it is mentioned in the Q, because of the changes to our internal control procedures in connection with implementing the new SAP software. We've been in the development phase of SAP for the past 6 months. We ran parallel with SAP during the first month of the second quarter and went live, as I mentioned, in May of 2011. The SAP software is working very well for us.

We are continuing to invest in the training that is necessary, with respect to bringing all of the employees within our European business up to speed in connection with the utilization and the benefits that this software has. And in addition, we are in the process of reworking all of our internal controls, as they need to change in connection with implementing our new software. Did this really have anything to do with some of the transitional issues? I'd be foolish to say no, because it certainly did have a little bit. But I think that the overall implementation of the SAP software went very, very smoothly, considering the size of the project that it actually is. And I thank you for asking this question.

And just as a follow-up to that, what are the key benefits that you expect to realize as a result of the SAP implementation?

Well, clearly, it was done in connection with moving into the twenty-first century; and also, when you look at the size of the business that we are running. Inter Parfums, over the past 6, 7, 10 years, has grown tremendously. So, the SAP software is clearly going to enable us and provide us the information we need to run our business for many, many years into the future.

I just need to push for a little bit more specificity. Can you help me drill down on what that means?

If you want to talk -- I don't that this -- a conference call of this is really the need for that. If you wanted to go into more detail, I have absolutely no problem with you giving me a call, and we can discuss it at length.

Sure thing. Thank you.

Linda Bolton-Weiser, Caris & Company.

Hi, just as a follow-up on the margins again -- can you explain why royalty expense as a percentage of sales was up year over year slightly in the second quarter, but it was down in the first quarter? Because I'm thinking Burberry was down 10% or 12% in the quarter, and that's the highest royalty-bearing brand you have. So, why would the royalty expense ratio have been up year over year?

I would have to look into the details on that for you. I could -- the only thing I can say is, some of the biggest brands that did show the biggest gains are royalty-based, which is Jimmy Choo and Montblanc. Lanvin, which is -- there's no royalty on, clearly didn't perform as well in the second quarter as it did in the first. But to go into a complete analysis of that, I would have to look at each of the individual brands. I'm not prepared for that here.

Can you give us some sense of Lanvin in the quarter, then? Because I think that was -- I think that you might have said it was up 35% in the first quarter. Was that significantly lower growth in the second quarter?

I'll tell you what the growth was. Lanvin was actually down slightly for the 3 months ended June 30, 2011, compared to June 2010.

And can you remind us -- do you have a major launch coming in the second half for the Lanvin brand?

Not a major launch.

There is no major launch for Lanvin this year, no.

Okay. Thanks.

Any other questions?

Eric Hollowaty, Stephens.

I just wanted to follow-up -- the current environment is inviting a lot of comparisons from investors, obviously, to the initial part of the downturn in late -- starting late 2007 and carrying through to mid-2009. And I'm wondering if you could share with us your thoughts on how the business may be positioned differently now, versus how it was then, perhaps in terms of things like -- how you feel about inventory levels at your retail partners, how you feel about maybe your product brand or geographic distribution. Any thoughts you might have on how investors might want to think about that in the context of your business would be very helpful, I think.

I can try to answer, but, of course, Russ, you can complete it. I would say that the inventory level at all different retailers worldwide, are usually low. That's why we did the larger warehouse, to replenish more quickly the orders that we receive are much more frequent than 2007 or 2008. So, our sales are higher and we ship more -- we ship more frequently. However, distributors or our retailers, that's from an inventory point of view. But from a brand point of view, the brands portfolio has grown. We have now, of course, [Burberry] in November.

We have added some very strong brand. We have very high expectations for Montblanc and Jimmy Choo, [that actually we signed], that are very positive. So, we have -- we are looking at the future very confidently. We have a strong brands, some that are known worldwide, from the (inaudible). And with the right amount of advertising, especially for the new Burberry. We are very comfortable for looking at this year.

The only thing that I would add to that, is that we have gained quite a bit of experience after seeing the -- working our way through the economic recession of late 2008 and early 2009. When you really look at the aftermath of what went on, our sales were minimally affected, I think. We were down maybe 10% in 2009 overall. I think we weathered that storm very, very well. Yes, I agree with Jean that there was some changes to consumer buying patterns, and there was a little bit of -- as a result, there were some changes with respect to inventory levels and the order patterns of some of our retail customers. But overall, our business continued to thrive, and we moved out of that economic recession very, very quickly.

By the time we got to the second half of 2009, we were already seeing gains with respect to sales; and certainly, that continued through 2010, and we expect that to continue into 2011. I think we have a great portfolio of brands. I think we are adding some really interesting brands to our existing portfolios, on both sides of the Atlantic. And as Jean said, and we all agree, that we are very optimistic with respect to the future of the brands that we have.

Great, thanks very much.

Thank you. There are no further questions at this time. I'll turn the conference back to Management for closing remarks.

Okay. Thank you, Operator. And, again, thank you all for your participation on this conference call, whether you are live on the call or listening via our webcast. As always, if you have additional questions or if I was unable to answer your questions in the extent of the detail that you would have liked, I am always available by phone. I thank you very much, and have a great day.

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