Interparfums Inc (IPAR) 2012 Q3 法說會逐字稿

Greetings, and welcome to the Inter Parfums, Inc., Third 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, Russell Greenberg, Executive Vice President and CFO. Thank you; Mr. Greenberg, you may begin.

Thank you. Good morning, and welcome to our 2012 third-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 our 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 headings Forward-Looking Statements and Risk Factors in our annual report on Form 10-K and the reports we file from 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 subsidiary 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.

Moving on to our third quarter, net sales decreased 3.2% to $166.3 million, from $171.7 million. At comparable foreign currency exchange rates, net sales actually rose 2%. European-based operations generated sales of $148.6 million, down 4% from $154.7 million, and sales by US-based operations were $17.7 million, up 4% from $17 million.

Gross margin was 60.8%, compared to 62.5%.

SG&A expense as a percentage of sales was 47.5%, compared to 50% in 2011.

Operating margin was 13.3% of net sales, compared to 12.6% of net sales in 2011.

Net income attributable to Inter Parfums was $10 million, compared to $10.4 million, and basic and diluted earnings per share came out to $0.33 per share, compared to $0.34.

Thus, for the nine months of 2012, net sales reached $477.2 million, or 12% ahead of the $426.1 million reported in the same period of 2011. At comparable foreign currency exchange rates, net sales rose 16.9%.

Net income attributable to Inter Parfums increased 11.8% to $31.5 million, or $1.03 per basic and diluted share from $28.2 million, or $0.92 per basic and diluted share, in 2011.

We are on track to achieve our 2012 guidance, which anticipates net sales of approximately $632 million, net income attributable to Inter Parfums of approximately $35.9 million, or $1.17 per diluted share. This guidance, of course, assumes that the dollar remains at current levels -- and keep in mind that on November 21, we will announce our formal guidance for 2013.

We already covered the subject of third quarter sales by brand and region in our October 23 sales release, and some of these pointers were also referenced in yesterday's news release. So let's move on from there.

Gross margin was off slightly, despite the margin gains associated with a stronger dollar versus the euro. These gains were entirely offset by changes in product mix, including a larger proportion of value sets and also because of some discounted sales of certain slow-moving product lines in our third quarter.

The decline in SG&A expense as a percentage of net sales for the third quarter is due in great part to a reduction in promotional and advertising expenses included in SG&A, both in dollars and as a percentage of net sales. In the current third quarter, promotion and advertising included in SG&A expenses declined to $31.2 million, or 18.8% of net sales. That compares to $37.2 million, or 21.6% of net sales, in last year's third quarter.

As most of you know, in 2011 our promotion and advertising budget was heavily weighted in the second half, corresponding with the advertising campaign rolled out for the launch of Burberry Body. This year, our advertising and promotional budget has been more evenly distributed throughout the year. However, for the first nine months of 2012, our promotion and advertising is actually running slightly ahead of last year, at $88.3 million, versus $78 million for the same period 2011.

For the current third quarter, royalty expense included in SG&A aggregated $14.7 million, or 8.8% of net sales, as compared to $14.3 million, or 8.3% of net sales, for the same period in 2011.

Also, as mentioned in our release, foreign currency losses aggregated $1.4 million for the current third quarter, compared to a gain of $1.2 million in the corresponding period of the prior year.

We have a very strong balance sheet and excellent liquidity. At the close of the third quarter, cash and cash equivalents aggregated $26 million, and working capital aggregated $241 million, for a working capital ratio of 2.8 to 1. We also had no long-term debt.

Through the first nine months, Inter Parfums generated cash flow from operations in excess of $22 million.

Before passing the call on to Jean, I just want to mention our transition agreement with Burberry, which runs through March 31, 2013, under which we will continue to operate certain aspects of the Burberry fragrance and beauty business. The transition agreement confirms that the exit payment of EUR181 million, or approximately $230 million at current exchange rates -- that was EUR181 million, which translates to $230 million at current exchange rates -- excluding receivables, inventory, and other tangible assets, will be made by December 31, 2012.

Jean, please continue.

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

Last month, we announced a 20-year worldwide license agreement with Karl Lagerfeld to create, produce, and distribute perfumes under the Karl Lagerfeld brand. We are receiving (inaudible) as the French fragrance licensee and, as you will read in our 10-Q, which we have just filed, we paid license and three (ph) fees of around EUR10 million, or approximately $12.5 million. And we mentioned that we have made an advance royalty payment to Lagerfeld of approximately EUR10 million, which is $12.5 million, which will decrease against the future royalty payments.

So we are on the same page with the Karl Lagerfeld team when it comes to brand positioning. In fact, I saw an interview in Women's Wear Daily of the CEO of Karl Lagerfeld and he said that (inaudible) along the lines of love at first sight when they met with us. We feel exactly the same way. Karl Lagerfeld is a fabulous addition to our luxury fashion brand portfolio, and we will give the brand a fresh start and we are not going to be marketing the brand with distinct fragrances. The launch of the new fragrance under the Karl Lagerfeld brand is scheduled for 2014 -- second half, 2014.

So this one, (ph) about the latest announcement that we made regarding Burberry, what you (inaudible) with Burberry, I would like to say that we had a great run with Burberry and we are very enthusiastic about the new chapter in our corporate life without Burberry. We have every confidence that over time, we will be able to (inaudible) sell by growing our current brands and by adding news ones. As I just mentioned, Karl Lagerfeld will be an important addition for (inaudible).

And as I said on the second quarter call, we have had some very interesting growth, we think, with many of our world brands. For example, Lanvin fragrances have grown at a compounded annual growth rate of 22% from 2004 to 2011. So that's seven years at 22%. And for the first nine months of this year, the sales were up 13% in Mont Blanc (ph) and Repetto.

Also, the up-to-date Mont Blanc fragrance sales are up 73% for the first nine months, confirming the continued success of Legend, our first men's scent, introduced last year. And Jimmy Choo fragrance sales based upon the G-nature (ph) scent that was launched in 2007, were up 43% in the first nine months of this last year.

Regarding the other brands in our portfolio, the release of Boucheron fragrance and the first initiative with Gycobrequet (ph), a new product, has yielded sales of EUR13 million, and this deserves of high degree of confidence in the future of this brand.

And as we previously announced, we have a big lineup of product launches in the works for 2013. Almost all our brands will have a new fragrance next year.

Also, we have a forceful suite of (inaudible) and (inaudible) and one we are hopeful. We cannot assure you when the agreements will be signed, but we are absolutely working on it.

Similarly, we are working on a (inaudible) of new names for our US-based operation. From Surrey (ph) base as a developer and supplier of fragrances and other personal care products to Gap and (inaudible) in North America, these events have added names and global distributions to its regimen. Many of the brands for whom we trade (ph) product have now international appeal. For example, Anna Sui is huge in Asia, while bebe is a highly sought-after brand in South and Central America.

Iconic American names like Gap and Banana Republic have a big following overseas, and we are filling these products in department stores, perfumeries, specialty stores, (inaudible) retail overseas, and licensed royalty arrangements with (inaudible).

We have (inaudible) and continuing strength, a very strong financial position, which will get even stronger by year-end with the (inaudible) of the Burberry event. A first-class reputation in our industry as a brand leader, as a worldwide distribution network, a (inaudible) model, a balanced and growth portfolio of brands, which will be grown in the future, plus a very creative and talented staff in Paris and in New York.

Before I take your questions, since this is our last conference call for this year, Russ and I want to wish you the very best for the holiday season and the coming year.

One last point -- Russ, and maybe myself, will be presenting at the California Dreaming Conference on December 11, which this year will be held in New York.

This ends our prepared remarks; so operator, you can open the floor for questions.

Thank you. (Operator Instructions) Neely Tamminga, Piper Jaffray.

Good morning, gentlemen. I wanted to just ask a very high-level question, Jean and Russ, in terms of kind of this post-Burberry sort of outlook for the next couple of years. I mean, is the strategy here to kind of redeploy into one big whale of a license, or is the strategy kind of shifting toward collecting some of the very up-and-coming potential fish, per se? We're just trying to get a better sense as to what some of the next steps possibly could be from that perspective.

Welcome, and thank you for this interesting question. I'm going to try to answer; Russ will maybe have something to add. What I would like to say is we signed with Karl Lagerfeld that just (inaudible) but even had we had Burberry, if we had signed with Karl Lagerfeld also, we think it's an extremely important addition and we had this important (inaudible), so of course the first idea would be to replace Burberry with that and it could be made with five different new names or one big one, but I think we're going to be, as usual, very opportunistic and be very close to what the market has to offer us.

And I will not tell you that, oh, I want to go some place on one big buy. Definitely, we want to use the money to deploy and grow the business. Karl Lagerfeld, which has a huge potential, was not very expensive. As I mentioned before, the cash at play was 20 million so you've got (inaudible) of 10 million because Lagerfeld (inaudible) that time from the royalty. And in 2014, we'll be able to launch a whole new line of Karl Lagerfeld products.

Karl Lagerfeld has an unbelievable name recognition in China, in Japan, in Europe -- East Europe or West Europe -- and of course, the US. So we have here a name that can give us some interesting results starting in 2014. Russ, do you want to add something?

Yes, the only thing -- just to go back, I think, to summarize what Jean was saying, really, is we're going to be opportunistic. It's very difficult to sit here and determine what might come across our nets in the future. It could very well be in the form of, as you coined the phrase, a whale; it's very possible. Or it could be a series of smaller types of acquisitions similar to what the Company has done in the past. The real key here is what opportunities are going to come across our desk.

All right. And I do want to follow up, and I really should have led with this. For you guys, I mean, it is a fantastic get from our perspective on the Karl Lagerfeld license, so I do want to congratulate you there. I think what you guys have proven over more than a decade is the ability to identify those next great global brands. And I think that that's completely right on point with your expertise.

I guess the other way to ask this is, are there existing relationships you have in your portfolio that you think are -- we heard the growth rates that you kind of listed off year to date on some of these names. Can some of these brands be the next Burberry, in terms of share size, to your P&L? We're just trying to conceptualize and contextualize that a little bit. Thanks.

I think that there are at least three or four brands within the portfolio that clearly have the potential to be EUR100 million brands, or $130 million, $120 million, $130 million-plus.

I think the one interesting thing, with respect to the portfolio, is it's certainly moving towards a much more balanced portfolio of brands. But what we are really looking for are brands that can reach at least that EUR100 million mark. Maybe it might take three years, four years, or five years, but that is part of the business plan that we're putting together when we evaluate new potential licenses.

That's really helpful, Russ and Jean, and best of luck to you guys, okay?

Thank you.

Thank you, Neely.

Joe Altobello, Oppenheimer.

Thank you. Good morning, guys. First question, I wanted to kind of delve into the transition agreement with Burberry for 1Q. It sounds like it's not quite business as usual; we're only going to be taking on certain aspects of -- or (inaudible) certain aspects of that license. What's the potential sales contribution in 1Q from that brand, and what does the profitability look like? Is it more or less than what you guys are seeing right now?

What types of (inaudible)?

The sales contribution you might see from Burberry. Because that's obviously not quite business as usual.

It's not business as usual. I believe we've even stated that there's even a cap in connection with sales during that quarter. But it's not going to be anything that is materially from what you would ordinarily expect in the first quarter for a brand that is not going to see a new launch. Because we're certainly not going to launch and come out with an advertising program for a new product in the very last quarter.

No, I would like -- this transition, really, Burberry came to us and asked us to continue for a few months because they are not ready, they are not ready at this time first to take the next quarter. So we are going to continue to invoice and we will keep the margin and like Russ said, it's one quarter. So we say that we will not do more than one quarter of the (inaudible) of Burberry.

Yes, and I think that the profitability would be just at the -- similar to what would be in the ordinary course of business. The key here is, what's the purpose of the transition agreement? The main purpose is to effectuate a smooth transition of this business in the most orderly possible way and hand it over to Burberry. We want to make it favorable for us and for them.

There's opportunity -- we're using it to bring inventory levels down. We've agreed -- as a matter of fact, we've disclosed that we expect inventory levels, by the transition, to be under EUR15 million. When we give the business then we can --

And what inventory we have left at the end of March, either Burberry will buy it or we will sell it in a sell-off period after that. So we're going to -- it's really to protect the brand. And don't forget, we have been doing these maps (ph) for almost 20 years, so it's important for us not to lose any market share and momentum during this transition. That's why we have agreed to help Burberry in this transition.

Okay, got it. And secondly, you did allude to, both on the call and the release, the margin impact you're seeing from the sale of some slow-moving goods at a discount. It seems like a little more than normal, I guess, since you called it out. But where are you seeing that, and which channels and which products are slow-moving? And is that continuing into fourth quarter?

I don't really expect the fourth quarter at nearly as much. But as always, not every product we launch is a home run. We had some issues in connection with the Burberry sport line and here it's a matter of just moving through some of the inventory issues that we have.

I've always said that you're never going to see any significant losses in connection with the sell-off of any finished good product that we have because we can always at least recoup costs. In this case, it's even much more than cost. But every once in a while, we do have to watch and we do have to work through inventory that may be a little bit on the slow-moving items.

Yes, and I think there was (inaudible) differently to (inaudible) some slow-moving product. But also on the fourth quarter, don't forget, we ship a lot of our gift set business, and these gift sets, which we present seasonally (inaudible) a (inaudible)% of our exchange of the third quarter, typically have higher cost of goods than the regular products. So I don't know what was the gross margin in the fourth quarter -- okay, a 2% swing. Absolutely in line with what we expected.

Okay, got it. Thanks, guys.

Thank you, Joe.

Thank you.

Eric Hollowaty, Stephens Inc.

Good morning, gentlemen. A while back, you referenced a travel amenities business that serves, maybe in the longer term, a growth platform to leverage some of your existing brands. I'm just wondering whether there was any update on that that you could give us.

Yes, that time we mentioned the growth of this new segment, I would say -- or, not segment but new area of business. And we have some chain, important chain, of hotel goods (inaudible). We will be supplying them shampoos, lotions, under the Lanvin trademark. We have started already delivery to certain locations in the world. (inaudible) familiar (inaudible) --

I know that it s a 120-hotels chain -- the exact number, I don't have that information off the top of my head; we can certainly provide that (inaudible).

But this is the first -- we have a contract at that time with them for three years. And we're going to see some (inaudible) in the fourth quarter and of course, next year, the positive impact on sales and profit.

That's great. How should we think about the margin profile of that business? Is it better, worse, comparable, to -- ?

It's similar and in line with our specialty retail business, which typically generates somewhere around the 50% gross margin. But keep in mind that there's no advertising, there's no selling expenses, there's no extras, marketing or merchandising type of expenses associated with sales of these products. Once you sign the contract with the customer, you're basically going to achieve your margin.

That's great to hear; thanks very much for the update. That's all I have.

Linda Bolton-Weiser, Caris & Company.

Hello, Linda.

Hi, how are you?

Very good.

Good. Just in terms of your deployment of the proceeds from the Burberry license, obviously you're going to be opportunistic and look for the best things to do, as you always have. But you can't control the timing of that.

Is there a point where you say, okay, time has gone one. We have this cash sitting here and we've done the deals that we can do, and therefore you would consider, like, a special dividend or something like that. What timing are you giving yourself to make that conclusion? Like, are you going to give yourselves all of 2013? And if you come to the end of 2013 and it's still a bunch of cash sitting there, would you do it then? Or, what's kind of your thinking on the time frame? Thanks.

Currently -- as we say, the objective is to attempt to deploy as much of the cash, if not all of it, as possible. I think as we move into 2013 and maybe as we get six, seven months down the road, we're going to (technical difficulty) where we stand (technical difficulty) the opportunity to deploy it because we do believe that that's the most accretive use of the funds.

So I would say as we move into the middle -- between the second and the third quarter of 2013 -- we will be taking a little bit of a harder look of the situation and the macro situation as to where we stand.

Yes, and to add to what Russ said, it depends also on other factors -- who we'll find in the next two to 12 months. If we are looking at a $400 million acquisition, then we'll have $200 million cash which will grow to $200 million. But if we are looking at a $50 million or $100 million acquisition, we will use the cash and we could also do a special dividend if we think that we don't need to keep the cash in the Company. So I think our plan, we are in a good position and interestingly enough, because of course a lot of people know that we have money, we are now looking at things that we are looking for (inaudible).

Okay, thanks. That's very helpful.

Thanks, Linda.

Thank you, Linda.

(Operator Instructions) Rommel Dionisio, Wedbush Securities.

Yes, thank you. Good morning. It seems over the last couple of years you guys have brought some of the distribution in certain European markets and the United States in house. But I just wondered if that was something that you're continuing to evaluate for other markets other than the ones you've already done.

That's an interesting question. When we first started looking at the potential for vertical expansion, we selected the four countries in Europe that surround France because of the proximity to France, the ease to oversee the distribution within those territories out of our home office in Paris. The United States was much more of an opportunity, taking advantage of an opportunity, at a particular point in time.

In many of the other countries around the world, we are working with some of the most well-known and largest distributors in those countries that -- it doesn't necessarily make sense, at least at this point in time, to look at further vertical expansion from a distribution network. We will continue to look at it and evaluate it, but currently, I really don't see expansion going beyond the six countries that we currently have our own distribution network.

It doesn't mean that we are not (inaudible) countries, but we think that having a distributor with a big sales force in Russia or in the Middle East carrying also other brands than the brands we have is better than having our own little small subsidiary in Dubai or in Moscow.

Great; thank you very much.

Thank you, Rommel.

Thank you.

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

Thank you, and thank everybody for your participation on this conference call. As always, whether you're on the call live or listening, if anybody should have any additional questions, as usual, I am available by phone. Thank you once again, and have a great day.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time; thank you for your participation.