Interparfums Inc (IPAR) 2013 Q2 法說會逐字稿

Greetings and welcome to the Inter Parfums 2013 second quarter 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, operator. Good morning and welcome to our 2013 second quarter conference call. Following the financial review, I will turn the call over to Jean Madar, our Chairman and CEO, for a business overview, and then we will move on to 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 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.

In addition, Regulation G, Codification for the Use of Non-GAAP Financial Measures, provides the conditions for the use of non-GAAP financial information in public disclosures. We believe that the presentation of the non-GAAP financial information included in this presentation is important supplemental measures of operating performance to investors. The information required to be disclosed for the presentation of non-GAAP financial measures is disclosed in our Annual Report on Form 10-K, which has been filed with the Securities and Exchange Commission. This information is available on our website at www.interparfumsinc.com.

Once again, 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. When we discuss our United States operations, we are primarily referring to sales of prestige and specialty retail products, as well as travel amenities, all conducted through our wholly-owned domestic subsidiaries.

Moving on to our second quarter results, as we reported yesterday, net sales decreased 19.3% to $117.5 million compared to $145.6 million. At comparable foreign currency exchange rates, net sales declined 20.6%. However, net sales excluding Burberry product sales increased 17% to $96.8 million from $82.7 million. Excluding Burberry product sales, European-based operations generated net sales of $72 million, an increase of 15% compared to $62.8 million in last year's second quarter. Sales by US-based operations were $24.8 million, up 24.4% from $20 million.

Gross margin was 54.1% compared to 60.8%. SG&A expense as a percentage of net sales was 47.4% compared to 52.1% in 2012. Operating margin was 6.7% of net sales compared to 8.7%, and net income attributable to Inter Parfums, Inc., was $3.8 million compared to $6 million. Basic and diluted earnings per share was $0.12 compared to $0.20.

We have amply covered second quarter sales drivers in our press release, so I will now focus on the dynamics impacting our profitability during the period. Gross margin was 54%, down from 61% in the second quarter of 2012, primarily due to the sales of the remaining Burberry inventory at lower than our typical gross margins. These sales also included the sale of certain inventories to Burberry, which were sold at our cost.

SG&A expenses, both in dollars and as a percentage of sales, were also down substantially due to the winding down of our relationship with Burberry. The reduction was most noticeable in promotion and advertising expenses, which were $22.4 million, or 19% of net sales, in the second quarter of 2013. That's down from $30.4 million, or 21% of net sales, in the prior year period. Royalty expense also declined significantly, to $6.8 million, or 5.8% of net sales. And that's down from $12.4 million, or 8.5% of net sales, in the prior year period.

Looking at some notable below-the-line items, there was a $2.1 million favorable swing in other income, reflecting a gain on foreign currency versus a loss in last year's second quarter. Additionally, interest income was up significantly, reflecting our substantial cash and short-term investment balance. Also of note, our effective income tax rate in the current second quarter was 50% as compared to 35% for the corresponding period of the prior year. In 2013, we incurred a new tax recently levied by the French government, which is equal to 3% on any dividend paid by a French company to its shareholders.

Turning to our cash flow and balance sheet, during the second quarter, as expected, we paid in excess of $70 million in taxes on the $198.8 million gain we recognized in December of 2012 for the termination of our license with Burberry. As a result, our second quarter operating cash flow was a use of just over $20 million. Even with this cash usage, our balance sheet remains extremely strong, with $400 million in working capital, including approximately $262 million in cash, cash equivalents, and short-term investments and no long-term debt as of the end of the second quarter.

With respect to our 2013 outlook, when we reported second quarter sales two weeks ago, we raised our guidance to approximately $525 million in net sales and $1.14 per diluted share in net income attributable to Inter Parfums. This implies breakeven earnings for the second half of the year. As we reported, we are planning significant investment in support of our core brands in the back half of 2013 as part of our multiyear strategy for growing sales and profits.

Jean, please continue.

Thank you and good morning, everyone. Thank you for your participation on today's conference call. We view the second quarter as a starting point for the next phase of our Company's evolution. And from the two announcements we have made since June 30, we have new brands we've added to our portfolio while wasting no time in implementing our growth strategy.

I'll talk about these two new brands, Shanghai Tang and Agent Provocateur, along with new product launches planned for the second half and for next year. So 2013 is shaping up to a big year for new launches. Thus far, our European-based operations included Flash by Jimmy Choo, Lanvin Me by Lanvin, Reve by Van Cleef & Arpels, and just a (inaudible) with signature scent for our dance-inspired Repetto brand. Also, we will soon launch Place Vendome, our first new woman's fragrance from Boucheron.

For our US operations, earlier this year we launched new products under the Gap, Banana Republic, and Bebe brands. Our thirteenth fragrance for the Anna Sui brand, La Vie de Boheme, is rolling out as we speak in the third quarter. We also have Bebe Nouveau, a new fragrance, launching soon, and sales of Alfred Dunhill legacy fragrance will be included for all of the second half of 2013.

Moving onto new initiatives, in recent weeks we have added two new scents to our brand portfolio, Shanghai Tang and Agent Provocateur. Shanghai Tang is a leading Chinese luxury brand. Shanghai Tang champions the richness and beauty of the Chinese culture through its contemporary lifestyle offer of apparel and accessories for men, women and children, as well as home collections. Shanghai Tang is a truly unique brand with exceptional potential to become a global beauty brand in the luxury segment, and we are committed to making this a highly successful venture.

China, as you know, is a strategic priority for Inter Parfums. And we have therefore established a new subsidiary in Hong Kong called Inter Parfums USA Hong Kong Limited to manage the global operations of the Shanghai Tang ground operations.

So we have the other brand, Agent Provocateur. Agent Provocateur is based in the UK and is best known for its very upscale and chic and quite provocative lingerie. Currently its products, which extend into swimwear, bridal, bedding and accessories, are sold globally at nearly 80 doors based in 26 countries, including its own boutiques, shop-in-shops within the finest department stores and specialty retailers. For the flavor of the brand and for the people who do not know, I suggest you visit the Agent Provocateur website, where a picture is worth a thousand words.

Initially, we are taking over the distribution of certain lines within this new brand. As well as reinventing the Agent Provocateur signature brand, we are planning to launch an entirely new scent for both Agent Provocateur and Shanghai Tang in 2014.

Before closing, I would like to mention some of our 2014 plans. The following is by no means complete. But next year we will launch our first fragrance lines for Shanghai Tang, Agent Provocateur, Alfred Dunhill, Balmain, and Karl Lagelfeld. We also have new product plans underway for the Mont Blanc and S.T. DuPont brands. Perhaps in the next quarterly call, we will be able to shed more on our other US-based events.

While we not speeding nor acting recklessly, we are clearly searching for new possibilities. While we are on the lookout for other suitable brands and acquisitions, we are very selective and turn down many brands that do not meet our criteria. It is our strong financial position, reputation in the industry, and history of success as our foundation, while increasing the enthusiasm and confidence about our Company's future prospects for growing and increasing shareholder value.

That ends my prepared remarks. And operator, you can open the floor for questions.

Thank you. (Operator Instructions.) Joe Altobello, Oppenheimer.

I guess the first question for Russ, if you back out the Burberry sales in the quarter, what was gross margin up or down?

Gross margin was actually up a little bit. It was very favorable in this quarter, probably closer to the 62% or 63%, maybe even slightly higher than that. Sales, as we mentioned, included the sales of Burberry, overall around $20 million. But in addition to that, there were sales of approximately $8 million direct to Burberry, which was sold at cost. So overall, the gross margins were very favorable, mainly because of product mix. As we move towards later in the year, as we do a little bit more of promotional type of selling, I would expect the gross margins to contract a little bit when you compare year on year. But for this particular quarter, gross margins are very favorable.

Okay, so there was $20 million of low-margin sales, and an additional $8 million of potentially no -- ?

No, included in the $20 million. That was sold directly to Burberry at cost.

Got it, okay. And then secondly, in terms of the spending in the back half of the year, and obviously, you guys have been very clear about this, I was just curious how we should look at that spend. Is this cash up investment, or essentially you guys got a windfall from Burberry and want to invest it? And then maybe secondly on top of that, how should we think about advertising spending next year on the base business?

It's a good question. As we -- and Jean, you can take it if you want -- for 2013, we have a significant number of new product launches, and a lot of the advertising spend is always done in that fourth quarter. And in many countries, our shipments to our customers, really, in a new launch, your pipeline shipments can happen anywhere during the year. But you'll typically have a relatively stronger third quarter in sales, whereas in the fourth quarter is really where the spending can become a very significant percentage of overall sales, because sales are typically lower in that fourth quarter.

Getting to the second part of your question, overall, for this quarter we came in around 19%. We, of course, were very low at the end of the first quarter. Somewhere right around that 20% to 21% is probably the right number at this point in time. But in a year like this, when you have as many new product launches as we do, almost for every single one of our major lines, that number could even be a little bit higher.

Got it. Okay, just one last one. The new tax rate we should be using going forward?

This is interesting, because typically, at our French subsidiary, we'll only pay dividends once a year. So we don't anticipate paying any additional dividends this year for our French subsidiary, and therefore the tax rate will revert to a normal tax rate in future quarters in 2013. The only way to model this is we typically do pay our dividend once a year. It happens, usually, (technical difficulty) so that will help you for modeling a little bit next year.

Okay, thank you.

Linda Bolton-Weiser, B. Riley.

So I guess this is the first quarter that we can gauge your fixed overhead cost structure and what it might be, going forward. So if you exclude the advertising and the royalties from SG&A, I guess it looks like about $26 million or $27 million in the quarter of selling, general, and administrative. So is that a decent number to use, going forward? I would think it would increase, though, a little bit, because some of the variable in the second half. But is that a good number to be thinking of as a run rate?

That's a very difficult question to answer because there is a significant amount of variable expenses that go along with sales. Even included in that that $27 million are servicing fees, which are variable, are logistical expenses, warehousing expenses that are also variable. So that's a very difficult question to answer, and I'm not even sure if the Company's even prepared to answer that.

Okay. And then I think in your 10-Q, you mentioned something about in the SG&A, there's some sort of -- I forgot what it was -- service or distribution or something that was significantly reduced year over year because of, now, Burberry not being in the business. And so is that the -- can you explain what that is? And then would the magnitude be similar in the next few quarters, or would the year-over-year decline in that be even bigger? Or is this a representative quarter for that?

I believe it's pretty much a representative quarter. This even sheds a little light on your prior question. Servicing fees are fees we pay to our distribution partners in certain locations, such as here in the United States, where we have an agreement with Clarins, and we share a sales force with Clarins. Because this is a variable expense, it's a percentage of sales, and because of the decline in sales as a result of the termination of the Burberry license, it makes sense that this number went down. As a percentage of sales, this number really did not fluctuate significantly because it is a variable expense.

Okay. And then in terms of your cash balance, which remains large, are you having any additional thoughts about whether you want to just hang onto that and keep your powder dry in terms of acquisition opportunities, or what are your most updated thoughts on that?

Jean, I assume you want to take that.

Yes, you know better. I answered this question a couple of weeks ago. Right now, there's anywhere. We are looking at growing our business, so for now we would like to keep this amount of money. And I would say towards the end of the year, I will look at it where we are and I will look at where we are at the end of the year and see if we stay with a stable of cash around it. But right now, as you can see, we have signed some new licenses. These new licenses do not need cash. We didn't pay for it. But we could be looking also at other of the mixes, and we are looking at those other mixes where we'll have to spend some significant amount of money. So roughly, we're keeping all our options open for now.

Okay. And then, as we look forward to the new launches in 2014, can you give us -- I guess we're looking at Karl Lagerfeld and the Shanghai Tang and then the Agent Provocateur. Do you think those will be first-half launches or second-half launches in 2014?

Like I said, it will be in the first half Agent, and Shanghai Tang will be second half. We'll have also in the second half, we'll have a new Dunhill fragrance, to be our first Dunhill fragrance made by (inaudible).

So next year will certainly be the year in which we do a full year without Burberry. And I think that's one of the reasons why we want to really push ourselves in the third and fourth quarter and spend a little bit more (inaudible). Again, while we're ahead this year, we have raised our guidance -- I don't know, two times, Russ? Three times already?

Yes, at least three times.

So we think it's a good time to do this kind of expense, because we're going to count on these brands to be the engine for future growth for 2014 and 2015.

Okay. All right. I guess that's all I have for now. Thank you very much.

Wendy Nicholson, Citi Research.

I'm really just struggling with the modeling a little bit. And if I take you at your word, that the third and the fourth quarter are really going to be breakeven, I have to assume that, given the timing of some of the launches, the heavy spending will probably continue into the first quarter. So is that a fair assumption, that the first quarter could actually have pretty significantly depressed earnings, even if I look at it apples-to-apples, taking out Burberry from this year's first quarter? So the long story made short, in 2014, do you think earnings will be above $1.14 that you're pegging for this year, or below?

Well, we haven't issued guidance for 2014 yet. The only thing that we have indicated in a post-Burberry environment is that we expect to be able to at least reach the 10% margins in a post-Burberry year. We're not prepared yet to issue guidance on 2014. We will do so -- normally, we introduce guidance in, I think it's the third week of November. We'll probably do that a little bit earlier this year to help the analysts a little bit in their modeling capabilities.

But to go back to your first question, as I mentioned earlier, the heavy advertising spend is usually in the fourth quarter. First quarter is not a huge quarter for ad spending. So I don't think you're going to see the kind of contraction in earnings that we're kind of anticipating in the back half of 2013 to continue.

But also keep in mind, first quarter of 2013 was an exceptional quarter because of the transition agreement that we had with Burberry. It included a significant amount of sales for Burberry with relatively little to no advertising requirement because we were really just accommodating Burberry for that three-month period.

So clearly, unequivocally, I could say that earnings in the first quarter of 2014 will be down significantly, but not because of extra spending in 2014, but more because of the very difficult comparison you have with the fact that the Burberry business continued in that first quarter of 2013.

Although we made the dollar, we made, what, over 30 --

We've got three in the first quarter alone, yes.

And that's what the other ones are for.

And then what did you say, just as we think again about 2014. The full year tax rate -- I know there's variability quarter to quarter, but in the full year tax rate, you think we'll be somewhere 35% to 40%, something in that range?

We typically owe around 35% to 36%. It may be up a percent, maybe 1%, because of this tax on the dividends. And again, if in fact we decide in 2014 to do some sort of a special dividend, that would be a one-shot charge. But if you're modeling, if you stick within that 35% to 36%, maybe give a little bit of a bump up in the second quarter, as I mentioned, because that's when our Paris operations usually declare on an annual basis.

Got it. Thank you very much. Appreciate it.

When would we begin the first indication of 2014, you said?

2014, normally it's usually in November. But I think that we're looking to do something, maybe even by the end of September or early October.

Okay.

Neely Tamminga, Piper Jaffray.

Great. Good morning. Russ, could you help us conceptualize a little bit on the gross margin side? Unless I missed this, you said it would be down slightly here in the back half. Is "down slightly" 100 basis points to you, or can you give us a little sense of that, and if there's any vagaries between the Q3 and the Q4 on a year-on-year basis.

And then also, if you could just speak broadly to how we should be thinking about inventory trends in a post-Burberry world, where will it start to normalize in terms of the rate of growth in inventories? That would be helpful, too. Thank you.

Okay, I'm going to try. There's only a limited amount I'm really allowed to say here. Inventory or gross margin fluctuations are typically a result of the different product mix. As we move into the latter half of the year, especially in the third and fourth quarter, your margins are a little bit lower because of promotional sales. We're talking here maybe 100 basis points, maybe 200 basis points. Burberry had typically given us a little bit of a boost because it was a very high-margin product. So overall, we're looking somewhere around 100 or 200 basis points in a gross margin.

The inventories themselves, right now, as you can see, inventories have certainly been declining, because at this point in time at the end of June, we have no Burberry inventory in-house. Reserves that were set up in anticipation of what was going to be given to Burberry for free were destroyed. Those had been fully utilized, as disclosed in our quarterly report. So we're really starting off with a clean slate.

Now, as we move forward, historically Inter Parfums has always increased or decreased its inventories based upon new product and the new product launch schedules. I think we're going to be consistent with what we have always done in the past. To a new product launch, we're going to be a little bit more liberal. We have the cash to spend. We would rather be able to push product out and sell the product than run short. So overall, I think you're going to probably see a consistent base inventory outstanding. Receivables outstanding have always been relatively consistent, running at around the 90 days and close to about 180 for the inventory. I think you're going to see some more consistency based upon historic trends.

That's helpful, Russ. And just one final question. I'm pretty sure I know the answer to this, but considering some of the other headlines out there today, can you just remind us what your exposure is to the mass channel, maybe the biggies like Walmart, specifically? Thanks.

Our product mostly in the mass channel, it's a low-end product, it's a dollar-store type product, a 99-cent store type of distribution. Our sales still run somewhere right around approximately $20 million. It's been fairly consistent. In some years, it's up 10%; some years, it's down 10%. We don't really see any significant exposure there. Jean, correct me if you think, if you have anything to say on that.

I agree.

Thank you. I just wanted to clarify that. Thanks.

(Operator Instructions.) David Cohen, Midwood Capital.

A question about advertising and promo and also about sales composition. So just to clarify, of the total sales, there were $20.7 million of revenue for Burberry products that had zero advertising and promo behind it. Is that correct?

That's correct.

So I think your total advertising promo is 19% of total sales, but if you back out those Burberry sales, that number goes to 23%. So I'm wondering if 23% is a more operable number for the next couple of quarters in terms of the level of advertising and promo.

I think that number is probably reasonable as we move into the third quarter, and I think it's going to be even higher when we move into the fourth.

Okay. And then in terms of, so for total revenue for the first half, I had about $130 million for Burberry, leaving non-Burberry at just about $201 million. Am I accurate in that arithmetic?

Off the top of my head, close. Those numbers have been disclosed, so --

Right, so given your guidance, you actually have of all the non-Burberry brands, the second half being less than the first half, and the growth rate being less in the second half than the first half. Is that --

If my numbers are correct, it was somewhere right around $400 million for non-Burberry sales for the full year.

Yes, I come out with $395 million, given your back half is -- backing into it now, $194 million.

As I said, somewhere around $400 million, okay.

And that's a growth rate of, first half versus second half, it's actually lower in the second half. So I'm wondering what's driving that, given the launches you have.

Because most of the significant launches for the year occurred already, earlier in the year. The Jimmy Choo and Mont Blanc and Lanvin, which are the three biggest brands within our portfolio, have all launched their new products in 2013 within the first two quarters.

Okay.

We have two in the first quarter. Of course, we'll continue the rollout of Jimmy Choo and Lanvin. We'll have Repetto. We have also the business coming from the new launch of Anna Sui and are starting this next month. So we have decided not to change the guidance.

Right. Can one characterize that as, okay, with those launches, you have a significant amount of sell-in, and then you may not have the visibility yet on what the sell-through and the replenishment is. Is that a fair characterization?

Yes, that is a fair characterization.

Yes. And again, we have even the new guidance, what, a couple of weeks ago, so we are not going to change it for the time. We have to, when we see fit at the end of the third quarter, we'll do another update (inaudible). If we see a reason to change our guidance, we'll do that.

Yes, I'm not asking you to change. I'm not asking for any new guidance.

Yes, but David, you're correct, David. There is a significant amount of sell-in, all right, when you first open up and you do have a new launch, and then you have your continuing sales as things move on. Fourth quarter's typically a low period because many of the retailers do not want to take additional product during the holiday season. So unless they're out of stock, we have to be a little bit conservative with respect to the numbers we're putting out as guidance. There's a possibility that we may be able to beat it, if everything sells through and the retailers want to reorder and get additional product into their stores, well, then, as Jean said, then we'll have to increase the number. But as of right now, based upon the visibility that we have, we're comfortable with the guidance that we've issued.

All right, thank you.

Linda Bolton-Weiser, B. Riley.

Just a follow-up on -- Elizabeth Arden today, in their comments, had expressed, they said the UK was very weak. And granted, they're not just fragrance; they have a cosmetic business as well. But can you just, for the record, just tell us what you're seeing specifically in the UK? I know that's an important market for you, and is it business as usual, or do you see it slowing? Or just can you give us some color there?

UK is a very important market for us, even without Burberry, because we have in our portfolio a lot of British brands, and we are even adding one with Agent Provocateur. So I will tell you UK for Jimmy Choo continue to perform very well, and also for Paul Smith, which is their main market for -- UK is a main market for Paul Smith. So we do not have, we have not seen for our brands any issues in the second quarter or even in the month of July in the UK. We'll expect that when we come up with a new fragrance for Agent Provocateur, we expect UK to be the number-one market for this brand. So UK is an important part of the market overall.

Thank you very much.

Neely Tamminga, Piper Jaffray.

I just want to get back on here and ask a fairly big picture question for Jean. If you will share with us your perspective on those two licenses that you just acquired, Agent Provocateur as well as Shanghai Tang, and then maybe also the upcoming Karl Lagerfeld and just the Anna Sui brand as well. How would you size up the longer-term potential of these four brands relative to your existing mega-brands of Lanvin, Jimmy Choo, and Mont Blanc? Do you think that they could be comparable in terms of size, or is there something about these brands that limit their distribution, ultimately? Could you share with us? Thanks.

I can try. I can try. I think you're right to put that as a point of comparison, the Lanvin and the Jimmy Choo. We think that Anna Sui has definitely the potential to become a $50 million brand. Today I would say we are now in the 30s, and we have still a lot of room to grow.

When we talk about the new brands, the really new brands, I think that (inaudible) scent, we've shown the public the collective area, and they are really excited and they are committed to give us a great amount of space. So I see that Choo has the potential to be in the top three brands, top two brands of the Company. Shanghai Tang was a strategic decision. We were very happy to sign with them, and by the way, our fourth license with the Richemont Group. We have already Mont Blanc, Van Cleef, Dunhill, and now Shanghai Tang. So we have a close relationship, as I can see, with the Richemont Group.

And Shanghai Tang is definitely a very good brand, a very luxury brand for China now. We wanted to have China export into the market. We have been interested in this country for more than 13 years. We have very often said, we had to leave Burberry, but even with all the other brands that we have and actually a lot of them are in the top 10 fragrances sold in China.

So we think that with Shanghai Tang, we have a very, very interesting proposition for our Chinese customer, good product for the first time will be made in China, and that's why we are doing the (inaudible) in Hong Kong and in China. We will be in department stores in China, we'll be selling in the Shanghai Tang stores. I think that Shanghai Tang is perceived to be locally -- not worldwide, but locally -- a very popular brand.

The last one, Agent Provocateur had this segment before. And we decided to take it over from its former British licensee. This brand has a lot of personality, but this is more on the niche side. But when we signed Jimmy Choo, it was also a niche brand, and it's now becoming the second-largest one in the Company. So the portfolio is very balanced with global and regional brands. And so then we continue to grow the portfolio in a good direction. Does this answer your question?

Yes, that's wonderful. Thank you, Jean, and best of luck to you guys.

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

Thank you, operator. And thank you all for participating on this conference call, whether you are live on the call or listening via our webcast. As always, if anyone does have additional questions, I always try to make myself available by phone. That concludes this call, and thank you for joining us, 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 all for your participation.