Interparfums Inc (IPAR) 2014 Q2 法說會逐字稿

Greetings and welcome to the Inter Parfums second quarter 2014 conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Russell Greenberg, Executive VP and CFO. Thank you, sir, you may begin.

Thank you, Operator. Good morning, and welcome to our 2014 second quarter conference call. Following the financial review, Jean Madar, our Chairman and CEO, will provide 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 time 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, part of codifications for the use of non-GAAP financial measures, prescribes 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 because it provides readers with a more complete disclosure and facilitates a more accurate comparison of current results to historic results. The information required to be disclosed for the presentation of non-GAAP financial measures is disclosed in our June 30, 2014 quarterly report on Form 10-Q, which has been filed with the Securities and Exchange Commission.

This information is available on our website at www.interparfumsinc.com. When we refer to our European-based operations, we are primarily talking about Prestige Fragrances, conducted through our 73% owned French subsidiary Inter Parfum SA. When we discuss our United States operations, we are primarily referring to sales of Prestige and specialty retail fragrance products, as well as travel amenities, all conducted through our wholly-owned domestic subsidiaries.

I need to preface this financial overview with a bit of Inter Parfum history. In the 2012 fourth quarter, our Burberry license was terminated and Burberry paid us a $239 million early termination fee.

We also entered into a transition agreement with Burberry to operate certain aspects of the business during the first quarter of 2013. As a result, our 2013 reported first quarter sales, gross margin, operating margin, and net margin were unusually high and in last year's second quarter, the sale to Burberry of our remaining Burberry inventory depressed gross margins during that period. As we have now been doing for the past several reporting periods, when I speak about ongoing brand sales, I am excluding Burberry brand sales from the 2013 periods.

So moving on to second quarter results, net sales of ongoing brands, excluding Burberry brand sales, increased 22.1% to $118.2 million from $96.8 million. At comparable foreign currency exchange rates, net sales of ongoing brands increased 20%.

Reported net sales of $118.2 million were up 0.6% compared with the $117.5 million reported in the 2013 quarter, which actually included Burberry brand sales. European-based operations generated sales of ongoing brands of $94.7 million, up 31.2% from $72.1 million.

Sales by US-based operations were $23.5 million compared to $24.7 million. Gross margin was 57.6% of net sales, up from 54.1% in the 2013 period.

SG&A expense as a percentage of sales was 46.8% compared to 47.4%. Operating margin came in at 10.9% of net sales compared to 6.7% of net sales in the 2013 period. Net income attributable to Inter Parfums, Inc. was $6.1 million compared to $3.8 million, and basic and diluted earnings per share came in at $0.20 compared to $0.12 in 2013.

We have reviewed sales drivers in our Q2 news release, so I will move on to other P&L points. Our blended gross of profit margin was 57.6% of net sales, which is in line with our expectation, with the increase primarily due to the impact of the sale of the remaining Burberry inventory at cost to Burberry during the second quarter of 2014. Selling, general, and administrative expense as a percentage of net sales was 46.8% or about $55.3 million, of which $20.3 million was attributable to promotion and advertising expense.

As a basis for comparison, promotion and advertising expense aggregated 17% of sales for the three months ended June 30, 2014 as compared to 19% for the corresponding period of the prior year, and as compared to only 12% for the three months ended March 31, 2014. I should point out that, similar to last year, a significant portion of our 2014 advertising spend is budgeted for the final quarter of the year.

Our financial position remains very strong. We entered the second half with $409 million in working capital, including approximately $275 million in cash, cash equivalents, and short-term investments and we had a working capital ratio of 5 to 1, as well as no long-term debt.

Our 2014 sales guidance remains unchanged at approximately $495 million, and we recently narrowed the range for net income attributable to Inter Parfums, Inc. to a range of $0.93 to $0.95 per diluted share, as we have greater visibility as we enter the second half of 2014. This guidance assumes the dollar remains at current levels. Jean, please continue.

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

As you will recall, 2014 first quarter sales of ongoing brands was 17% ahead of last year. In the second quarter of this year, the comparable sales increase was 22%. Therefore, the full year-over-year sales increase of approximately 15% that we have inferred in our guidance appears to be quite achievable.

We have also previously [referred] our launch plans for the remainder of the year, including Jimmy Choo for Man, our first men's scent for the brand, with advertising featuring Kit Harington from Game of Thrones; ST Dupont, the new fragrances, one each for man and for woman, and one for woman from the ST Dupont brand. We're going to launch, also, a fragrance in the second half of Paris Saint Germain under a partnership with ST Dupont and the Paris Saint Germain, Europe's premier football franchise, and Elegance for female fragrance line.

We will also launch later this year, Icon by Dunhill, which will initially be very selective distribution, including Harrods, with a rollout to broader international distribution in 2015. We will also achieve the Shanghai scent collection of nine new scents in limited distribution, 50 or so Shanghai stores, which is to be followed by selective international distribution in 2015.

Just one more point on the new products, our first newly-created Agent Provocateur scent called Fatale is debuting at Saks this week, and we'll be selling in the Agent Provocateur (inaudible) shop and also at the main counters. We'll be in 37 Saks locations and we have a six-month exclusive in the US with Saks. As we have reported, the fragrance was also launched at Agent Provocateur boutiques in the US and worldwide.

New product launch, while exciting and newsworthy, are only a part of what we do. We continually enrich and enhance our existing brands and product portfolio by bringing extension to the market. Sometimes our [flankers], such as Bebe Nouveau Chic, which flanks the brand's Nouveau collection, we'll also do special holiday press and unique programs and packaging for retail.

And sometimes we overhaul and refresh packaging, as we are doing for our first-ever speciality retail program, with the collection from Banana Republic, which was launched in 2006. Of course, the products are extremely important to our business.

We spoke about our 2015 plans, but to repeat, we will launch, in 2015, our first Oscar de la Renta women's scent to come to the market next year and we are looking at its debut. We have also a men's scent in the works for Lanvin and Balmain and woman's scent from Montblanc and Van Cleef and Arpels and then one each men's and woman's for Boucheron. We see an addition to a global rollout of the Dunhill Icon and the Shanghai scent collection.

Looking forward, I couldn't be more enthusiastic about our business, our growth opportunities, and our business model. We've got a terrific brand portfolio, an extremely talented and driven team, a very strong financial position, and a great track record of developing successful new products that enhance the brands of our fragrance partner and expand the brand's reach and global distribution. All of these factors make our Company an attractive partner for the right brands.

As we have said before, we are in the market for acquisitions, new license, or partnership, or other growth initiatives that may arise, but we are not dependent upon such transactions to grow our business. With that, Operator, please open the line for questions.

(Operator Instructions) Joe Altobello, Oppenheimer.

Thank you. Good morning.

First question, I want to go back to the guidance. Obviously, you mentioned that you recently revised it downward. I was trying to get a sense for why that was? Are you seeing the need to spend more to drive growth, or was it just more clarity given that this is the first full year that you'll have without Burberry at this point?

Yes. Good morning, Joe.

I think it's clear that there's a little bit more clarity now that there's six months behind us through 2014 and that's really what it comes down to. We've never really given such a large range. Even historically, I doubt that we've ever in the past even gave a range for per share earnings.

This year, because of the fact that it is the first year for Burberry, we gave that range and now that we have a little bit of history behind us and a little bit more visibility, it made sense for us to narrow in on that, and I think we'll continue to do that as the year goes on.

Okay. So nothing has changed from an economic or competitive landscape?

No. There really has been nothing of any significance that really caused any change. We're still within the initial range that we started with during the year. We're just a little bit more focused on where we think we're going to end up. As we gain more insight as to where we think we're going to end up, we think it's important to adjust our guidance to reflect that.

Okay. And then that leads to my next question, which was, I think six months ago, you mentioned that you thought that you could probably generate an additional $100 million to $150 million in sales without much in the way of incremental G&A. Where do we stand today on that sort of leverage opportunity now that we're six months into that process? Do you still feel that there's that much leverage in the model? And how much additional sales could you generate on your current infrastructure? Thanks.

I can try to answer this one, but this was -- . We think that there is a still a lot of leverage. We think that our team can absorb easily another $100 million. We have, as you remember, after we finished with Burberry, we decided to keep mostly all the team intact, so from a human point of view, we have a resource. We have the human resource to capture more sales with the same amount of employees. When it comes to -- this is for G&A. But from a selling point of view, Russ, maybe want to talk about the advertising and things like that?

Yes. Advertising is extremely important. Our advertising budget is a little bit higher today than it was historically. If you remember last year at the end of 2013, advertising for ongoing brands aggregated approximately 22% overall. I think that, in past quarters during these conference calls, we indicated that we're going to probably be somewhere around that 21% mark, give or take a few points.

It's very consistent with where we ended up last year. But on the leverage question, the answer is yes. A lot of our business is variable, which is going to run with the increase in sales, but to the extent of the fixed expenditures, we can easily add on, as Jean indicated, $50 million or $100 million with very little increase in the G&A, if any. We're just as comfortable with that today as we were when we mentioned it in the past, Joe.

Okay. Thanks Russ, thanks Jean.

Neely Tamminga, Piper Jaffray.

Great. Good morning.

Jean or for Russ, so in the vein of putting some of your cash to work, could you characterize, maybe a little bit more explicitly, some of your appetite for adding some additional new licenses and the timing in around that. It sounds like there's some big players in this industry who are looking to cull through some of their licenses overall in the fragrance land, and just wondering if the landscape looks even richer for you guys today versus maybe even a quarter ago? Maybe if you can also speak to, is there a different type of size of license that you'd be willing to take on?

Russ, you can start if you want.

Certainly. Neely, you're right. Recently, we have heard of several of our much larger competitors in this industry, who are perhaps looking to divest in certain of their brands that they don't feel continue to be as strategic to them. As we have always in the past, we are certainly going to be actively involved in the process and have already made the necessary contacts in order to do that.

With our cash position, we are actively pursuing quite a few different opportunities. The timing of any of them is absolutely impossible to tell because some deals may never happen. Some deals could take six months to negotiate. Some deals that we've done in the past could take over a year to negotiate, so it's very difficult to pinpoint timing. But I assure you that our appetite to get some things done is very strong.

It's definitely there. We know that the best use for the cash that we have is if we can put it to use in our business with new opportunities to grow our business. We clearly know that is the most accretive use of that cash. We are being very opportunistic in order to do that.

And I would like to add if I may, I would like to add this it is really a perfect time for us to grow and to go to the next level, not only because of the $300 million of cash and no debt that we have on our balance sheet. But I think also, because we have, like I said before, all our people, even all the people that most of the people that were working with Burberry are still in the team, so we're waiting for the to grow.

I think we're going to find very soon some opportunities. But I think it's also very important is that the company has an excellent reputation with potential new partners and this is key, because I think that they like to see what we have done for the other brands in the portfolio. Take, for example, of Montblanc, who was not doing a lot before us and we've been able to triple the business and still growing and we saw the growth of Montblanc, I think almost 80% in the first six months of this year, which is quite impressive. So we're able to revise some brands and we're able, also, to create new brands so we are very optimistic that, in the near future, new opportunities will happen.

Thank you so much. Best of luck.

Linda Bolton Weiser, B Riley and Company.

Hi. I think that maybe with your narrowing the earnings guidance range to the lower end of the range, but keeping the sales guidance the same, I think there could be some concerns out there that somehow the sales guidance is at risk for the year; that, that would be the next step that you would take. Can you just comment on your confidence in the strength of launch schedule for the rest of the year?

And maybe give us some color on the ones that are really doing better than your expectations in terms of the launches that have occurred and then the ones that are only in line with your expectations. Give us some flavor for your confidence in that sales guidance number for the year. Thank you.

I can start if you want, Russ, and you can correct me if I -- I hope I'm not wrong. What you've seen in the first six months is strong growth from our European operations and a little decline, almost flat, for the US if you remember, Linda. We anticipate the next six months in the US to be much better in terms of growth, still looking at the growth of 10%, around 10% in the US. I am personally comfortable with the sales guidance that we have given you.

What is at risk -- no. I would say that most of the launches or all of the launches that we have are on time. We have already taken into account that the new Lancome will come very late in the year, Dunhill also will come very late in the year. The Jimmy Choo Man is on time. Other important launches, I'm okay with the vision. Russ, you want to add something?

Yes. Just to really kind of reiterate a little bit. We're very comfortable with the guidance that we have out there on sales. If we weren't comfortable, we would've adjusted or changed it. But the numbers that Jean had thrown out with respect to even the US growth of 10%, that guidance reflects whatever our launch plan is currently. We know that our Dunhill fragrance is going to be a selective launch in 2014 and is really geared for 2015.

Same thing with Shanghai Tang. That's all built into our guidance number. The launches that have already taken place and those that are yet to come on our European business are all on time, are all pretty much there in the book already. We know what our expectations are in the backlog of sales that we have. So the guidance that we have $495 million for 2014, we are very confident in that figure.

If the dollar remains, of course, at the current level, which is an important piece of the equation.

Okay. Great.

Correct.

That's helpful. Thank you. And then, can I also ask just about your cash flow? Your operating cash flow in the first half is a little bit lower, more negative than last year, but you still should have pretty strong cash flow for the year, I would expect.

Given that you're very eager to do a deal, are you leaning towards keeping your powder dry so to speak? Or are you thinking toward another special cash dividend toward the end of the year? Or maybe you can give us some thoughts on that. Thanks.

I think, from a cash flow standpoint, most of the cash, especially the operating cash that was used, was really used in the first three months of the year. If you actually looked at the cash flow or the use of cash in the first three months versus the use of cash in the first six months, there's around a $15 million gain in the second quarter of the year.

With that said, we do expect to be in a positive position as the year continues to go. We think that, based upon our launch schedules, the inventory levels will probably come down a little bit. Receivables have been very, very consistent, so we're really not anticipating any significant change and therefore, we should be in a positive position by the end of the year.

Our Board meets and if, in fact, a dividend was declared or whatever, it would have been previously announced. At this point in time, since there was no announcement, there is no intention at the current time, but our Board meets every quarter, so we'll continue to evaluate. We'll continue to seek what our cash needs are. We need to also take into consideration some of the activity that we're looking at from the acquisition side. We know we have plenty of cash, but we want to be as opportunistic as we can and we want to be able to take advantage of those opportunities if and when they arise.

Great. Thank you very much.

Rommel Dionisio, Wedbush.

Yes. Thank you. Good morning.

Jean, I think you mentioned Shanghai Tang would be initially in 50 stores in China and then eventually be outside of China. Could you just talk about what the distribution platform will be outside of China? Will that be department stores or specialty retail or travel retail, also the specific countries?

Of course. Okay.

Shanghai Tang, as you know, is the first and maybe only luxury brand from China. We signed this license agreement more than a year ago. Those products, we have created five products for women and three products for men, so it's a full collection that will go out at the end of the year. But we'll be launching in Shanghai Tang store in November.

After that, we will expand just after the November/ December launch, we will expand to specialty stores, perfumeries, department stores in a selective way, for instance, Harrods in the UK will be our other partner for the launch of Shanghai Tang and in Germany, for instance, we'll be present in a select number of doors that do that. We have no plans yet for the US, even though some presentations have been made in America.

But outside of mainland China, outside of Hong Kong and China, we're going to try to move to Southeast of Asia with Singapore, Indonesia, where the brand is very well known. For us, it's an important launch. We have commissioned (inaudible) to do a fantastic advertising with a model, a superstar Chinese model.

We think it's important for Inter Parfums to have the relationship with Shanghai Tang because it's the only luxury brand out of China and if we do it right, we can and will be happy in two or three, four years from now to have a solid business in mainland China. We'll invest heavily in advertising in China in 2015.

Okay. Thank you very much, Jean.

Frank a kettle, Sidoti & Company.

Hi. Just a couple quick questions.

One, you had pretty strong results from every region, except for obviously Eastern Europe, which we understand what's going on there. Could you just give some commentary on Asian market? Was that just a lack of new brands? Is it a reflection of what's going on in the economy there? Can you just add some flavor to that?

Russ?

Yes. Certainly. When we talk about the Asian market, it's always a picture of a comparison from years past. As we look at 2014, our sales in Asia-Pacific were up slightly. They weren't down. But that growth rate is less than we have experienced in the past. I think that's really kind of a trend that we've been experiencing over the last two or three years. However, that is a dynamic economy.

We think that there's clearly going to be a turn in the Asian-Pacific economy. As Jean just mentioned, we're investing heavily with some of our brands which are dominant in the Asia-Pacific region, brands such as Anna Sui and Shanghai Tang. It's a matter of the economic situation that exists today. But we think it's going to be short-lived and it's going to turnaround for tomorrow.

Jean, is there anything that --

Yes. I agree. Of course, we look at Shanghai not from one quarter to another, it's a long, long vision that we have for the country. That's why we select in our portfolio the brands that have a good chance to success. Anna Sui, for instance, is in the top 10 brands in China. Shanghai Tang is [not] in China, the fragrance will be launching, so our goal will be to make the top 20 start and the top 10 in the future. Yes. In this vision, we have to take a longer term vision. Otherwise --

Sure. Okay. Great. Just specifically on Karl Lagerfeld, I know initially you launched that in a limited distribution. Is that still limited distribution or where is that currently distributed today?

No. We have a rolled out Karl dual fragrance men's and women's, in the most important markets. We had some good success in Northern Europe and also Central and Eastern Europe. It's more difficult in the US for sure. But we are on target with our budget with Karl.

Do you think that's more an indication of the US consumer or just see your thoughts there, opinion there?

Still difficult to say. Our launch in Macy's was strong. But for instance, we performed better when we launched Montblanc in the US, so we're on track. We have a good recognition in South America. We are starting to increase our distribution duty free with Lagerfeld. So we are confident.

Okay. Final question, just for Russ on the effective tax rate. It was high this quarter because of the dividend in France. Correct? Could you just walk us through, mechanically, how that works?

Yes. That's absolutely correct. The tax on the dividend was approximately $800,000 that hit our tax account or tax expense account during the second quarter. It only happens usually in the second quarter, because it's a tax that is on the dividends that we distribute to our shareholders out of Europe, and that dividend is usually done once a year during the month of -- the very end of May.

Great. Thank you.

(Operator Instructions) Joe Altobello, Oppenheimer,

Hello. Just two quick follow-ups, I know you don't like to give quarterly guidance, but it would probably be helpful for us who are trying to build models here for the back half of the year. For you Russ, first, would you expect sales to be up in the third quarter, given the strong base period you're comping against? Second would you expect earnings to be positive in the fourth quarter, given that you lost $0.13 last year? Thanks.

I can't give sales guidance, the breaking out by quarter, because we just don't do that. We know you could pretty much infer what we're going to have for the rest of the year. But earnings, the one thing I can say about earnings is, if you look at last year and you can easily see that last year's fourth quarter was a loss. As I've mentioned in my prepared remarks for this conference call, that similar to last year, we anticipate that a significant portion of our yearly ad budget is going to occur in the fourth quarter of the year.

If that follows suit with the prior year, there's a very good possibility that we will end up in a loss situation during the fourth quarter. I think if you sharpen your pencils and look at your models and look at our actual results for the prior year, also keep in mind that in the second, in the third and the fourth quarter, you have no influence from Burberry anymore. That was finished.

We had the transition period that occurred in the first quarter of 2013. We had the sell off of the inventory at cost in the second quarter of 2013. Now we walk into a more normalized ongoing brand comparison. It should be a little bit easier for you to adjust your models. I hope that helps.

It does. Thank you.

Linda Bolton Weiser, B. Riley and Company.

Hi. I'm just trying to understand, the gross margin in the quarter was a little bit better than I would've expected and it did increase from the first quarter level. Is that just a mix issue because the US was down in sales, so it was mix? Or is there something else that made it better?

Just wondering about third quarter because I know you ship in a lot of the gift sets for Christmas and that hurts the gross margin. So maybe you could help a little on that. Thanks.

Yes. The margin for the second quarter came in pretty much almost exactly as we had modeled. Even on prior conference calls, we've talked about that margin around 57%, maybe sometimes 58%. I also remember discussing in prior calls that the third quarter of the year margins are a little bit under pressure because of the fact that we're shipping a tremendous number of gift sets for the holiday season, which tend to be a little bit more expensive for us or a little bit less profitable from a margin standpoint.

So if any quarter, we would expect that the margins to be at their lowest would be the third quarter of the year. But overall, that blend coming in today at almost 58%, yes, there's a slight mix because of product but nothing all that significant, Linda.

Okay. Thanks a lot.

It seems we have no further questions. At this time, I would like to turn the floor back to Management for closing remarks.

Thank you, operator. One last point, just to mention I will be presenting at the Wedbush California Dreaming Consumer Conference on September 23, which will be held in New York and I hope to see some of you at this event. Again, thank you for your participation on this conference call, whether you are live on the call or listening via our web cast. If any of you have additional questions, as usual, I am available by phone. Thank you and have a great day.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.