Interparfums Inc (IPAR) 2011 Q3 法說會逐字稿

Greetings and welcome to the Inter Parfums third 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 reminder this conference is being recorded. It is now my pleasure to introduce your Russell Greenberg, Chief Financial Officer and Executive Vice President of Inter Parfums. Thank you. You may begin.

Thank you. Good morning. Welcome to our 2011 third 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 recent launches and update you on recent agreements.

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 of 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, designer fragrances sold through 100% owned subsidiaries based here in New York.

Now for third quarter highlights. Net sales increased 42% to $171.7 million from $120.9 million. At comparable foreign currency exchange rates, net sales rose 36%. European based operations generated sales of $154.7 million up 42% from $109.2 million. Sales by US-based operations were $17 million up 46% from $11.7 million. Gross margin was 63% compared to 59%. SG&A expenses as a percentage of sales was 51% compared to 45%. Operating margins were 12.6% of sales compared to 13.7%.

Net income attributable to Inter Parfums, Inc. rose 24% to $10.4 million from $8.4 million, and basic and diluted earnings per share increased 21% to $0.34 from $0.28.

Thus, through the first nine months of 2011, net sales were $426 million, or 22% ahead of $348 million in the corresponding period of 2010. At comparable foreign currency exchange rates, net sales rose approximately 18%. Net income attributable to Inter Parfums, Inc. increased 38% to $28.2 million, or $0.92 per basic and diluted share from $20.4 million, or $0.67 per basic and diluted share.

Assuming the dollar remains at current levels, we are on track to achieve our current guidance of $570 million in sales resulting in income attributable to Inter Parfums, Inc. of $32.5 million, or $1.05 per diluted share. The major third quarter sales drivers were the global launch of Burberry Body, the exceptional staying power of the Jimmy Choo signature scent for women, and Montblanc Legend for men. Jimmy Choo, which launched earlier this year, was not in our sales mix in 2010, and Montblanc, which also launched earlier this year, had minimal sales in 2010.

In addition, the commencement in January 2011 of European-based product distribution in the United States by Inter Parfums' Luxury Brands, a subsidiary of Inter Parfums SA, also contributed to sales growth. Finally, third quarter launches of Betsey Johnson Too Too and bebe Gold, plus strong international product placement and sales of our specialty retail brands, drove the increase for US operations.

The gross margin improvement is primarily the result of us taking over European product distribution in the United States,offset somewhat by the negative impact of a weaker US dollar versus the euro and product mix. The average euro to dollar exchange rate in the current third quarter was 1.41 as compared to 1.29 one year earlier.

Promotion and advertising, included in SG&A, increased to $37.2 million and represented 22% of sales in the current third quarter, as compared to $19.2 million, or 16% of sales in last year's third quarter. The increase reflects the global launch of Burberry Body, for which with we have embarked on the largest campaign in our history. As we indicated in our prior conference call, our overall advertising and promotional expenditures are heavily weighted towards the second half of the year. In addition, all promotion and advertising expenses for our European-based brands that are distributed in the US are now borne by us. In previous years, those advertising expenditures were shared with our former third-party distributer.

Royalty expense, included in SG&A, was $14.3 million in the current third quarter, or 8.3% of net sales, compared to last year's $10.8 million, or 8.9% of net sales. The percentage decrease is primarily due to the taking over of the US distribution of European-based products.

Our effective tax rate was 40.5% for the three months ended September 30, 2011, as compared to 32.5% for the corresponding period of the prior year. In October 2011, our Company agreed in principal with the French tax authorities on the consequences of a tax audit which covered both income tax and non-income tax items. As a result, income tax expense increased by $1.7 million, and our reserve for a contingency relating to a non-income tax item originally recorded in 2011 was reduced by $1.3 million.

We have continued to maintain a very strong balance sheet and liquidity. At the close of the third quarter, cash, cash equivalents, and short-term investments aggregated $30 million, and working capital aggregated $209 million for a working capital ratio of 2.2 to 1. We entered the holiday season with inventories of $182.3 million, up slightly from the $176 million at June 30, 2011. As our 2011 guidance implies, some of this inventory will be converted into fourth quarter sales, while some of it will support anticipated sales growth and new licensing activities in 2012 for both European operations and US operations.

Jean, please continue.

Thank you, Russ, and good morning everyone. We appreciate your participation on today's conference call.

Moving on to European-based operations, Burberry Body came to market in September in what has been and will continue to be the largest global fragrance launch in our history. We estimate that when all is said and done, the fragrance will be available for sale in approximately 10,000 doors. The ad campaign is in full swing, primarily in women's and fashion press. Plus we have monumental billboards in the high traffic areas of major cities throughout the world. We will start TV advertising in Europe next month.

We have not seen cessation in demand for Jimmy Choo signature fragrance since its launch in the first quarter. Interestingly, third quarter brand sales approximated $11.2 million, and year-to-date sales were almost $30 million. During the third quarter, Jimmy Choo rolled out to Sephora stores throughout Europe, and in 2012 the fragrance will be in wider distribution in US specialty and department stores.

Rarely has our men's business performed as well as Montblanc Legend. Launched in the second quarter, Legend has been a huge and thus far enduring success in many parts of the world, such as Sweden, Poland, Mexico, Far East, and Middle East. In the third quarter we recorded $11.1 million of sales of Legend, and $28.8 million year-to-date. Montblanc is a good example of how we optimize our sales and marketing activities by placing products in markets where a brand has a strong following. In 2012, we will expand the brand portfolio with our first Montblanc fragrance for women.

As most of you know, in January we will take over production and sale of existing Balmain fragrance, and in late 2012 or early 2013, we will launch a new Balmain scent. Perhaps a little background on Balmain is in order. When French couturier Pierre Balmain founded his couture house in 1945, he was among the design giants responsible for reenergizing lavish couture after World War II. He dressed European royalties and movie stars. After that, the label had its ups and downssince Balmain's death in 1982. But in 2005, investors began reviving the brand, bringing in new designers, and today, you can find a lot of celebrities wearing Balmain fashion. Our Balmain business model is similar to that of Lanvin, another older brand that has been reinvented, reinvigorated, and has been very rewarding for us. While I am on the subject of Lanvin, let me mention that we will be adding a new women's scent to the portfolio in 2012.

Boucheron came under our umbrella officially at the start of the year, but quite frankly there was very little inventory and only recently have we commenced product sales of existing fragrance. We have a new scent in the works for Boucheron for launching in 2012.

I will now share some of our initial plans for 2012 for our US-based operations. We will launch a new fragrance for Nine West. This fragrance is called Love Fury and it will debut in February 2012 at all Nine West retail stores, in all Nine West retail stores the US and internationally,and we will also launch in Macy's in the US. I think you will agree when you see the bottle design that we have gone all out on this one. It was inspired by the idea of a stiletto heel breaking through the glass. The ad campaigns kick off in February and we are working on the broader distribution of this initial Nine West fragrance.

In 2012 we will have also a new fragrance for Banana Republic called Wildbloom. It will be a flanker for Wildbloom. And a new men's scent in the works for the first half, also for Banana. For Gap, we will have new scents for men and women in the first quarter to build upon the brand's 1969 fashion theme. Another men's fragrance called Soul is planned for top Gap doors in the spring.

For bebe, we are starting a new fragrance family under the name Wishes and Dreams and it is planned to be launched in April of 2012. Later in the spring, we will have a new Brooks Brothers scent called Miss Madison coming to market. In the second half of 2012, a Betsey Johnson Too Too flanker is planned, and the Lane Bryant performance body care collection is expected to be rolled out nationwide in the coming year.

Come the new year, 2012, we will take over distribution and inventory of existing fragrances from under the Anna Sui brand. As we reported, we currently plan to launch a new women's scent in the fall of 2012. 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 expanding the brand's fragrance presence in North America, Europe, and the Middle East. We are also in discussions with other specialty retailers to establish additional partnerships, and while of course there can be no assurance, we think some will come to fruition in the new year.

A few final points. Russ will be presenting at the Citi Mid Cap Conference in Vegas on November 16, and the Wedbush Consumer Conference on December 6th in Santa Monica. As we noted yesterday, we plan to issue our initial 2012 guidance on November 16th. So since this is our last conference call for the year, and before we take your questions, Russ and I want to wish all of you the very best for the holiday season and the coming year.

Thanks again for your participation on our call. Operator, you can please open the lines for questions.

Thank you. At this time we will now conduct the question and answer session. (Operator Instructions). Our first question comes from Eric Hollowaty with Stephens. Please state your question.

Yes, a couple of quick ones. Russ, what should we expect for the tax rate going forward? Is this a new normal, or was third quarter an anomaly?

No, as I mentioned in the opening remarks, this is a one-time, I will call it a charge. Basically it was something that came up in audit a while ago, back in 2010, that we had accrued for as a non-income tax item. The ending settlement with the French tax authorities was for a similar amount but related to an income tax item. So it is basically a reclassification between SG&A and income taxes, and that now puts this tax audit behind us, so this is really a one-shot to the tax expense side with a small benefit in the SG&A line. So I would go back to our normalized tax rates, which as we indicate in our filings is somewhere around, between 34% and 35%.

Okay. Great. And Jean Madar, you mentioned in your prepared comments that you expect Burberry Body at full distribution to be in about 10,000 doors worldwide. Any sense you can give us for at the end of the third quarter, where it was relative to that number?

The end of the third quarter was the end of September. We had the launch in the US, we had the launch in major cities. We have not started the launch in China. You know that China is a very, very strong market for Burberry, because Burberry is in the top five fragrances in China. What I can tell you is that the launch is doing well. We have certain surprises in the US. We did an exclusive. We have started to launch with Macy's and the sales are doing well. The key season is going to be, the first real indication will happen, I would say during the week of Thanksgiving. But in terms of selling, we have sold over our initial projections.

Great. One more. I was on the Inter Parfums, Inc. website, and noticed that you have something called a Hotel & Travel collection, and was wondering what you would share with respect to how you view the potential of that business?

Yes. 18 months ago we have started this division by hiring a group of people working for amenities for hotels. We have developed a full collection under the Lanvin brand, and we have been presenting it to hotels. We are going to start seeing some sales in the fourth quarter, but most of the sales will happen in 2012. We are bidding for contracts. We have a chain of hotels, like Sofitel, and other Far East groups, and Middle East also where Lanvin is very strong.

Terrific. Thanks very much and good luck.

Thank you.

Thank you. Our next question comes from Joe Altobello with Oppenheimer & Co. Please state your question.

Hi. This is actually Christina filling in for Joe today. I just had a question about guidance. It seems like your EPS for the year is showing that the fourth quarter EPS is going to meaningfully decline. I was wondering if you could explain this?

The current guidance as we just indicated when we increased the sales guidance just a couple of weeks ago, we indicated that we have a significant ad program in place in connection with the Burberry Body launch. In keeping with our internal projections, it very well may be where earnings could be slightly below that of last year. It is still very difficult to tell exactly what the overall sell-through is going to be in connection with the Burberry Body launch. If we can, in fact, maybe perhaps beat our sales guidance, then maybe the earnings will go up a little bit. But with the ad dollars that are being planned, we are comfortable with the guidance that we have issued.

Also, just keep in mind, even as the quarter we just reported, we spent over 22% of our sales in promotion and advertising related expenditures, where that number is usually somewhere between 16% and 18%. In addition, there is a significant amount of promotional items such as gift sets, which are sold especially in the fourth quarter. And even there, we will end up seeing more promotional dollars go through the point of sale type of advertising expenditures. So yes, that is what our guidance implies, and those are the reasons for it.

Do you know what range your advertising expense is going to be in the fourth quarter?

Specific dollars, no. We don't go into that kind of detail with respect to our guidance. You can--

But you can see the trend. If during the first two quarters we were at 16%. Now you said, Russ, we are at 22% for the third quarter. I think fourth quarter will be even higher than 22%.

I agree with that. But exact numbers, we are not prepared to disclose.

Okay. Great. Thank you so much.

Thank you.

Thank you. (Operator Instructions). Our next question comes from Alex Fuhrman with Piper Jaffray. Please state your question. Alex Fuhrman, your line is open.

Perhaps his question has been answered.

Okay. (Operator Instructions). Ladies and gentlemen, there appears to be no further questions at this time. I will turn the conference back to management for closing remarks.

Okay. Thank you, Operator. And I want to thank everybody who participated on this call, whether you are live on the call or listening via our website. And as usual, if something does come to mind and you do have additional questions, please feel free to call my office. Thank you very much,and have a great day.

Thank you. This concludes today's conference. All parties may disconnect. Have a great day.