Interparfums Inc (IPAR) 2012 Q2 法說會逐字稿

Greetings and welcome to the Inter Parfums, Incorporated second-quarter 2012 conference call. At this time, all participants are in a listen-only mode. A brief 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, Mr. Russell Greenberg, CFO and Executive Vice President for Inter Parfums Incorporated. Thank you, Mr. Greenberg, you may now begin.

Thank you, operator. Good morning and welcome to our 2012 second-quarter conference call. Following the financial review, I will turn the call over to Jean Madar, our Chairman and CEO, who will share some business highlights and then we will take your questions.

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 heading Forward-Looking Statements and Risk Factors in Inter Parfums' annual report on Form 10-K and the reports we file from time to time with the Securities and Exchange Commission. We do not intend to and undertake 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 73%-owned French subsidiary, Inter Parfums SA. This business includes distribution companies owned or controlled by our French subsidiaries, such as Inter Parfums Luxury Brands, which took over US distribution of our European-based prestige fragrances in 2011. It also includes our distribution subsidiaries in Germany, Italy, the United Kingdom and Spain.

When we discuss our United States operations, we are generally referring to sales of specialty retail and mass-market products. Specialty retail products are typically sold at namesake stores domestically and in department and specialty stores in the United States and internationally under license agreements with the brand owners.

One point worth repeating is that January 1 of this year was the one-year anniversary of Inter Parfums Luxury Brands, our wholly-owned subsidiary of Inter Parfums SA and the distributor of prestige products in the United States. Thus, quarterly and year-to-date comparisons of gross margin and SG&A expenses are more apples-to-apples than they were in 2011.

In addition, the increase in sales from European-based operations in 2012 reflect higher sales volume, as opposed to an increase from the difference between ex-factory and wholesale sales in the United States.

Moving on to our record second quarter, net sales increased 20% to $145.6 million from $121.1 million. At comparable foreign currency exchange rates, net sales actually rose 29%. European-based operations generated sales of $125.6 million, up 18% from $106.5 million, and sales by US-based operations were $20 million, up 37% from $14.6 million.

Gross margin was 60.8% compared to 61.6%. SG&A expense as a percentage of sales was 52.1% compared to 52.6%. Operating margins were 8.7% of net sales as compared to 9% in the 2011 period. Net income attributable to Inter Parfums Inc. increased 20% to $6 million as compared to $5 million. And finally, basic and diluted earnings per share were $0.20, up 25% compared to $0.16.

Thus, for the first half of 2012, net sales were $310.9 million, or 22% ahead of $254.4 million in the first half of 2011. At comparable foreign currency exchange rates, net sales rose approximately 27%. Net income attributable to Inter Parfums Inc. increased 21% to $21.5 million from $17.8 million and diluted earnings per share were $0.70 as compared to $0.58 in the first half of 2011.

We already covered the subject of second-quarter sales drivers in July when we announced second quarter sales, and we referenced them in yesterday's news release, so let's move on from there.

As I just mentioned, now that it has been over a year since Inter Parfums Luxury Brands took over prestige product distribution in the United States, gross margins from one period to the next are more comparable. Gross margin of 60.8% was off only slightly from 61.6% in the second quarter of 2011. We had some margin gains associated with currency fluctuations, which were offset by changes in product mix.

As noted, in the current second quarter, there were a larger proportion of value sets sold as compared to the same period last year. This was particularly the case in connection with Burberry and the Jimmy Choo brand sales.

SG&A expenses as a percentage of net sales were 52.1%, just slightly lower than the 52.6% in last year's second quarter. Promotion and advertising included in SG&A expenses increased to $30.4 million, or 21% of net sales, from $22.5 million, or 19% of net sales, in last year's second quarter.

It bears repeating that in 2011, the promotion and advertising budget was heavily weighed to the second half of the year, timed with the unprecedented advertising campaign in support of the launch of Burberry Body. While our advertising budget for all brands is running at a high level in 2012 to maintain the positive sales momentum and growth in market share, we are and expect to remain below 2011 levels.

For the current second quarter, royalty expense included in SG&A expense aggregated $12.4 million, or 8.5% of net sales, as compared to $10.8 million, or 8.9% of net sales for the same period in 2011.

We have a very strong balance sheet and excellent liquidity. At the close of the second quarter, cash and cash equivalents aggregated $23 million, working capital aggregated $223 million, which resulted in a working capital ratio of 2.7 to 1. We also had no long-term debt.

As we announced last month, our 2012 guidance anticipates net sales of approximately $632 million, with resulting net income attributable to Inter Parfums Inc. of approximately $35.9 million, or $1.17 per diluted share. This guidance assumes the dollar remains at current levels.

Jean, please continue.

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

As we have reported, Burberry will buy out the license rights for EUR180 million or approximately $220 million at current exchange rates, exclusive of receivables, inventories and other tangible assets. We recognize that many of your questions and concerns relate to the end of our license agreement with Burberry on December 31. Quite frankly, we have been thinking a great deal about it too. We see this new chapter in our corporate life as an exciting one and one in which we have a great deal of confidence.

One of the reasons of our confidence is the knowledge that much of what we have accomplished with Burberry can be repeated with other brands in our portfolio. From 1994 or 1995 when we launched our first Burberry fragrance through 2011, Burberry fragrance has increased at a compound annual growth rate of 27%.

We've had some very impressive growth with other brands as well. For example in the seven-year period that Lanvin fragrance has been in our portfolio, brand sales have grown at a compound annual growth rate of 22% from [$20 million] to [$80 million] in 2011.

In addition to (inaudible), we have some potential secret (inaudible) brands in our portfolio, for example, Jimmy Choo. With only one Jimmy Choo fragrance in our first year, we were able to generate net sales of nearly $41 million, and brand sales continued to grow at a fast pace in 2012.

We have some notable and continuing strengths. Like Russ said just before, a very fine strong financial position. Also industry recognition as a brand builder, a worldwide distribution network, a scalable business model, a balanced portfolio of brands, plus a wonderfully creative, talented and [innovative] staff. As a result, we are confident that as we refocus, 2013 [net sales -- of course we] (inaudible) can reach approximately $400 million, generating also a (inaudible) around 10% operating margin, with (inaudible) brands in our portfolio.

In the coming year, we have a huge lineup for 2014, with launches planned under Jimmy Choo, Van Cleef & Arpels, Paul Smith, Lanvin, Balmain, Repetto and Boucheron brands.

Of course, in addition to organic sales, we are featuring other designers, other brand owners and (inaudible), and while we are hopeful, (inaudible) assure you that (inaudible). At seven (inaudible), we create extraordinary value for the brand owner with really no risk, and we expand the reach of their brands to new customers.

In 2013, we will have even deeper pockets, starting the year with approximately $250 million in cash and expect considerable borrowing (inaudible). But we are not -- and we are not under any pressure to (inaudible) this, nor is there any rush.

I want to come back to a (inaudible) initiative I mentioned several quarters ago; namely, the travel amenities. I am talking about the shampoos and lotions that you often find in a hotel or when you travel. We have a lot to learn about this business, and found that there is more to it than just shrinking sizes. It involves matching the travel [venue] to the brand and (inaudible) supplier. I am pleased to report that we have a (inaudible). We currently supply Air France with Lanvin travel amenities for (inaudible), and will be on board with China Airlines for both first and business class in the fourth quarter of 2012.

In addition, we are in the final stage of contract negotiations with a five-star hotel chain with over 100 hotels worldwide that we expect to sign at the end of this month. At this point in time, the travel amenities business barely moves the needle on our sales (inaudible) as one with significant growth potential over time.

So this ends our prepared remarks, so operator, we can open the floor for questions, please.

(Operator Instructions). Joe Alta Bello, Oppenheimer.

Thanks. Good morning, guys. Just a couple of questions here. I guess in terms of the Burberry exit and looking forward to 2013, you guys will have a fair amount of cash on the balance sheet. And I think in the past you have said your first priority clearly is the sort of to fill the hole in the portfolio left by Burberry. What is the market for fragrance licenses these days and what type of brand or brands would you be looking for?

I will start by answering. I don't think that the strategy with respect to brands that we have followed probably for the last 15 years is going to change. One of the most important aspects of our business is when you look at the classic brands that are in our prestige fragrance portfolio. We are going to continue on those trends, and what is most important for us is when we evaluate a brand is making sure and looking to see if it has the international cachet, meaning that it could utilize the international sales force or the international distribution team that we have.

It is very rare for us to sign a license with a brand that is totally concentrated in just a small area, say even in the United States, for that matter. Having a brand that can be distributed through our worldwide network is really something that we look for -- it is one of the key priorities in connection with something that we would be looking at.

Are there opportunities out there like that?

There are definitely opportunities out there (multiple speakers).

(inaudible) if I may interrupt. (inaudible) contact with a lot of brand owners. Some brands they don't have a license; sometimes they do have a license, since we change. Some also larger companies may decide to refocus their portfolio, so we could going forward look at something that is in other hands and maybe it is too slow for a large or very large corporation, but can be where we can do to each other (inaudible). So we (inaudible) see some opportunity.

Okay, got it. And then just in terms of the Burberry brand, obviously, it has been very profitable for you guys the last couple of decades now. Is there a risk that there is sort of a reverse halo effect, so to speak, where if you lose the Burberry brand that it may detract from the strength of other brands that may have benefited from that relationship with Burberry?

I think that Burberry was representative of a very large portion of our sales (inaudible). But I would say in talking to all our distributors worldwide, the quality of the brands that we have in our portfolio will make -- will be very valuable without Burberry. There is a (inaudible) demand for the other brands.

Burberry was of course representing a large amount -- a big chunk of our sales, but they were of course (inaudible) foundation for our (inaudible). Russ, you may want to comment on that?

Yes. No, I think you hit it, that the main part is really within the distribution network. The other brands in our portfolio have a clear sense of themselves, and I don't believe that is going to impact the relationship we have with the distribution network or their ability to market the fragrances into the retail network.

I think there is clearly some significant strengths there and we will see what happens moving forward.

Okay. And just one last one if I could. Does the loss of Burberry or the pending loss of Burberry impact at all the way you are going to operate in the back half of the year, whether it comes to A&P spending or the timing of launches, et cetera?

May I answer (inaudible). For us, we have (inaudible) in terms of (inaudible). So we are going to save the (inaudible) to the last day. And we have an agreement with Burberry regarding royalties (inaudible) absolutely make changes of (inaudible).

Of how we are going to manage the business for the next (inaudible) months, that of course we need to prepare ourselves for what is happening, for what we are (inaudible) January 1 for a lot of our A&D and to prepare the launches of -- all the launches of the new products we have for the (inaudible) brands besides Burberry next year (inaudible).

Great. Thanks, guys.

Russ, you wanted to add something, no?

No, as far as we are concerned, it is business as usual.

Thank you.

Linda Bolton-Weiser, Caris.

Hi. Can you just explain a little bit more about -- you said that you expect a cash position of around $250 million at the end of the calendar year. Will the conversion of the working capital related to Burberry to cash be completed at calendar year-end or does some of that kind of flow over into the next year?

And also, is there any kind of like a transition services type situation that you envision? Or are you just absolutely cutting it off right at the end of the year in terms of dealing with Burberry?

And then finally, related to that also, I guess -- you know, your North American distribution joint venture would continue to distribute Burberry, I would imagine. But is there a chance of losing that distribution if somebody else takes over the license, like an Estee Lauder or a L'Oreal, for example? And is the distribution of that organization as Burberry like a bigger percentage of the distribution versus of your own sales? Is it really dominated by Burberry or is it actually more diversified in terms of that distribution organization? Thanks.

Do you want to ask (inaudible) about the cash (inaudible) and then (inaudible)?

I will start. So far, I have got about four different questions that were in there, or at least three.

With respect to the cash, the $250 million estimate is really, I guess, either a late 2012 or early 2013 number. We basically are looking at what our expected cash position is. Yes, we will receive EUR181 million.

The working capital will take care of itself. It really depends on what happens first with inventory, because there is an option for Burberry to buy the existing inventory. If they don't buy the existing inventory, then we have a selloff period. So it will take probably three to four months in order to convert all the working capital to cash. But at the same time, as we have mentioned, there is taxes to be paid on the EUR181 million, the money we are receiving for the license, but those taxes won't have to be paid for several months or whatever the case may be.

So we are kind of looking at what the position will be once all these things are wound down or at a particular point in time.

With respect to cut-off of the rights, this is really a negotiation that is ongoing between Inter Parfums and Burberry. The way the license is written, yes, there is a cut-off as of December 31. But as we answered the last question, it is business as usual. We are working on new launches for Burberry. We are going to take their lead on this. If they need some help or we need to transition the business or we need to take three or four months or whatever the case may be, we are looking to do whatever it is that Burberry needs in order to make this as smooth of a transition as possible.

The third question you had with respect to the distribution subsidiary here in the United States, that is yet to be seen. It really depends on what the wishes of Burberry are. If they want to use our distribution subsidiary, certainly they are entitled to or they can. I am sure we would be willing to work with them to some extent.

If they don't, these distribution subsidiaries will remain intact. We have a remaining portfolio of products that are -- who have products that go through these distribution subsidiaries. Our relationship with the Clarins' team and the partnership we have with them is expected to be ongoing. I don't really see any changes.

Jean, do you have anything that maybe (technical difficulty)?

No, no. Regarding our relationship with (inaudible) that we have in cooperation with Clarins, Burberry represents a (inaudible) is the consequences of our sales [team].

If Burberry decides it is very conceivable not to use our distributor (inaudible) in the US, it will still be a viable (inaudible) for us for the other brands that we have in our portfolio.

As well as Burberry will be able (inaudible) the decision not to continue the negotiations (inaudible) two weeks ago. So we need to -- we have shown the (inaudible) question on the (inaudible) condition, and that is expected to take us three months or four months or (inaudible) -- maybe up to six months, but not longer than that, to (inaudible), like you said, or through another company that will -- that Burberry will (inaudible) if they want to do it through someone else.

Eric Hollowaty, Stephens Inc.

Thank you. I wanted to just touch on the travel amenities business, and thank you, Jean Madar, for providing an update on that. I just wanted to quickly revisit the details. I heard Lanvin with Air France, but didn't catch the date on that, just couldn't hear through the conference call. And then China Airlines in the fourth quarter, but didn't catch the brand on that. And then a five-star hotel chain with 100 doors. But anything else that we might have missed there would be great.

No, you have not missed a lot. We were happy to get the Air France (inaudible) business. We just expanded to China Airlines. We will be shipping very soon. So (inaudible) months (inaudible) the airlines we mentioned, and these, usually you have to work a year or two in advance because they have contracts with other brands. And it is an interesting and a profitable business.

And the other business is definitely the amenities that you find in the hotels, and I think that to start with a big contract (inaudible) for IP is a huge hotel chain, a five-star. It is with Lanvin also. We found that Lanvin resonated very well with a lot of European or Asian hotel chains, so we will be in the future pushing the Lanvin brand in these amenities. So we are off to a good start, but a little slow. It could get a little longer, but now I think we have a real strategy (inaudible).

That's great. And in terms of the margins on those products, how do they compare, say, on a gross margin basis to your core product categories?

Our (inaudible) group is a little bit higher than our average cost of goods, but there is almost no SG&A, so it is not (inaudible). And the G&A (inaudible) private company, so there is not the (inaudible), there is no promotion, there is no (inaudible) structure. We just have to -- and you have a little bit higher cost of goods. So I would say overall the net contribution, it is a quite profitable business. Russ?

No, I tend to agree. The cost of goods is closer to the cost of goods we have on specialty retail than it is on the prestige side of the business. But as Jean said -- he is 100% right -- there is really no incremental selling expenses, no advertising, there is not a marketing campaign or anything along those lines. So bottom line, it is a nice, profitable business.

That's great to hear. Good luck with it.

Thank you.

Thank you.

(Operator Instructions). Linda Bolton-Weiser, Caris.

Hi. I just wanted to follow up again. I am not sure if I heard all the comments that you made about, again, the areas you are looking into for potential acquisitions. I mean, my feel or my understanding from you is that you really want to do what you are good at, which is prestige fashion brands that have global appeal.

But are you willing to open your consideration to, just for example, maybe looking at some celebrity type fragrances or even looking at something like skincare or a color cosmetic brand or even personal care? I mean, how open-minded are you or are you not? You know, just can you give a little more color on your thinking?

I can try. As we (inaudible) had some experience with acquisitions, we know what we are good at and we know what we are less good at. So skincare and color cosmetics will not be in our target. So no customer [chemistry] (inaudible), no color. And we say that we are good at fragrances, so we will (inaudible) that as a priority. (inaudible) business in fragrances. Could (inaudible) I don't think -- we don't have go to the (inaudible). But our main focus will be definitely fragrance.

Again, as I said, we took over Lanvin. Lanvin had the business. It was under license with L'Oreal. We took Anna Sui from P&G. We took Mont Blanc from P&G. We took Boucheron from Gucci Group. So in the last three, four, five, six years we have been able to find (inaudible) and make it successful, so I'm really, really not worried about the use of our money.

Great, thank you.

Eric Hollowaty, Stephens Inc.

Hey, Russ, a follow-up for you. Can you remind us -- was part of your CapEx budget under Burberry going to the buildout of the Burberry beauty counters at point-of-sale? And if that is true, given that that business is going away in 2013, any sense of what a reasonable CapEx run rate might look like in 2013?

Without going into too much detail on that, we used a relatively short amortization period for those counters. So I don't -- and the number of counters is still relatively minimal. So I am not expecting any sort of a sizable write-off in connection with that, but certainly there will be some dollars that will be allocated against the money that we are receiving for the brand.

Okay. All right.

I can't go into too much detail, but again, with a relatively short amortization period -- because you never knew -- each of the contracts were individual contracts with the retail stores. Some were one-year contracts, some were two-year contracts. So with that in mind (multiple speakers).

I don't think it grew the last two years.

Yes, I don't think so either. I wasn't 100% sure of that, but I didn't think so.

I see. Okay, I was less concerned about the potential write-offs and more just trying to come up with a normalized free cash flow (multiple speakers) for you guys in 2013. Basically you're saying you would rather not give out the number? (multiple speakers) the impact to CapEx for --

As far as the actual spending on (multiple speakers) --

Yes, the spend.

I think -- we normally have always spent -- it is actually very difficult to do that, because there is a certain amount of spend that is always done for the tooling and molds. And we kind of go into some detail in the 10-Q on that. So you can probably extrapolate from what is written in the 10-Q, if you look back a few quarters.

Okay.

All right? But specific numbers, we have never disclosed.

Okay. All right. Thanks, Russ.

Mr. Greenberg, there are no further questions at this time. I would like to turn the floor back over to you for any closing comments you may have.

Thank you, operator. And again, thank you all for your participation on this call, whether you are live on the call or listening via our webcast. If anyone has additional questions, as usual, I am available by phone. Thank you and have a great day.

Ladies and gentlemen, this does conclude today's conference. You may disconnect your lines at this time and we thank you all for your participation. Good day.