Interparfums Inc (IPAR) 2014 Q3 法說會逐字稿

Greetings and welcome to the Inter Parfums, Inc. third-quarter 2014 conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Russ Greenberg, Chief Financial Officer and Executive Vice President of Inter Parfums. Thank you, sir, you may begin.

Thank you, operator. Good morning and welcome to our 2014 third-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 codifications for the use of non-GAAP financial measures describes the conditions for the use of non-GAAP financial information in public disclosures. We believe that the presentation of the non-GAAP financial information that is 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 September 30, 2014 quarterly report on Form 10-Q, which has already 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 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 the sale of prestige and specialty retail fragrance products, as well as travel amenities; all conducted through our fully-owned domestic subsidiaries.

As a reminder, in the 2012 fourth quarter, our Burberry license was terminated and Burberry paid us a $240 million early termination fee. We also entered into a transition agreement to operate certain assets of the business during the first quarter of 2013, which resulted in an unusually high 2013 first quarter sales, gross margin, operating margin, and net margin. Then, in the 2013 second quarter, the sale to Burberry of remaining Burberry inventory depressed the gross margins during that period. Beginning with the 2014 third quarter, comparisons with the prior year's quarterly figures are more comparable than they were in the first half. In addition, when I speak about ongoing brand sales, I am excluding Burberry brand sales from the 2013 periods.

Moving on to third quarter results, net sales increased 6% to $134.2 million from $126.8 million. At comparable foreign currency exchange rates, net sales increased 5.1%. European-based operations generated sales of $103.4 million, up 5.7% from $98.1 million. Sales by US-based operations were $30.8 million, up 6.9% compared to $28.7 million. Gross margin was 56.1% of net sales, up from 55.2%. SG&A expense as a percentage of net sales came in at 42.2% compared to 43.7%. Operating income increased 28% to $18.7 million compared to $14.6 million. Operating margin was 13.9% of net sales as compared to 11.6% of net sales. Net income attributable to Inter Parfums, Inc. was $11.1 million compared to $7.9 million and diluted earnings per share came in at $0.36 as compared to $0.25. We have reviewed sale drivers in our Q3 news release, so I'll move on to other P&L points.

Our gross profit margin, as just mentioned, came in at 56.1% of net sales, up from 55.2%, which, as we noted in our news release yesterday, was attributable to better product mix for our European-based sales and for US-based operations, it was a higher concentration of prestige brand products, which typically generate higher margins than specialty retail products. Selling, general, and administrative expense as a percentage of sales was 42.2% or about $56.6 million; of which, $20.7 million or 15.5% of net sales was attributable to promotion and advertisement. In last year's third quarter, SG&A was $55.4 million or 43.7% of net sales; of which, $20.9 million or 16.5% of sales was for promotion and advertising. As we have stated, a significant portion of our 2014 advertising spend is budgeted for the final quarter of the year.

We filed our third quarter 10-Q yesterday and you will see an expanded discussion of financial analysis, but I wanted to repeat a point we made in our news release yesterday. 2014 third quarter net income attributable to Inter Parfums benefited from foreign currency gains of approximately $1.1 million and a 32% effective tax rate, as compared to a $100,000 foreign currency loss in the prior year and a 35% effective tax rate in last year's third quarter. Our financial position remains very strong. We entered the final quarter with $392 million in working capital, which includes approximately $247 million in cash and cash equivalents and short-term investments for a working capital ratio of 4.7 to 1 and we still have no long-term debt. That means that we are well-prepared to our grow our business through brand extension, as well as by potentially adding new brands through licensing, partnerships, joint ventures, or acquisitions.

As you may recall, 2014 first quarter sales of ongoing brands was 17% ahead of last year. In the second quarter, the comparable period increase was 22% and in the third quarter, 6%, bringing the nine-month, year-over-year sales increase of ongoing brands to approximately 14.2%. Despite the strengthening of the US dollar against the euro, we have maintained our 2014 sales guidance at approximately $495 million, which means a nearly 15% year-over-year increase in sales of ongoing brands. We are looking for net income attributable to Inter Parfums, Inc. to come in at approximately $0.93 to $0.95 per diluted share and this guidance, of course, assumes that the dollar remains at current levels.

Jean?

Thank you, Russ. I am Jean Madar. Good morning, everyone. Once again, we appreciate your participation on today's conference call. Some of our more recent launches are showing great promise. For example, Jimmy Choo for men, our first men's scent for the brand, has achieved a higher than unexpected order intake and it looks like favorable trends are continuing.

We are also very pleased by the early success of our new Agent Provocateur scent for women called Fatale, which was launched exclusively [across] the US and on the shelf of the [Saks Fifth Avenue New York]. [Subject] to change, our plan for 2015 going to effective new product launch schedule. We will introduce Icon by Dunhill in Harrod's in January 2015. Then in duty-free locations in Europe, Russia, [by the end of the month] with global rollouts as the year unfolds, 2015.

As we mentioned in the past, our [Oscar de la Renta] women's scent and a new women's scent for Montblanc are in the works for 2015 and a men's scent for [Lanvin and Balmain]. Also, a men and women dual is being prepared for Boucheron. The [Shanghai Tang] Collection will also be in distribution with a [book just in time] for the Chinese New Year in February. Also in the works are (inaudible).

(inaudible) have become more than a part of our US operations, which is (inaudible) or more addition to our US (inaudible), Oscar de la Renta, Agent Provocateur, (inaudible) our traditional (inaudible) where we produce fragrance and (inaudible) products (inaudible) percentage of mix shift. Today, international (inaudible). So while you are looking to partner with other special key retailers, the traditional model may make way for only one, depending upon the (inaudible) geographic or international reach.

We are enthusiastic about the growth opportunities for our business and ability to capitalize upon them. We have a rare and profitable (inaudible), a global reach in 100 countries, (inaudible) and an extremely strong balance sheet. Our stellar reputation (inaudible) successful new products that enhance the brand of our sales partner and expand their advantage. As we have done in the past, we will releasing our sales and earnings guidance for 2015 after the market close on Monday, November 10.

Before we take the questions, it seems to be our last conference call for the year and I want to wish all of you the very best the holiday season and the upcoming year. With that, operator, would you please open up the lines for questions?

(Operator Instructions)

Our first question comes from the line of Wendy Nicholson with Citi Research.

Hello. My first question has to do with the cash balance and just in terms of your outlook for M&A.

I know you're looking to acquire potentially some new brands and some new licenses. But do you have a timeframe in mind where, let's say we're sitting here six months from now or 12 months from now and you haven't used any of that cash. Would you consider another dividend or a buyback? Or how do you think about that?

As we've said in the past, we certainly haven't really been sitting idly. We have been evaluating several different opportunities as they appear. Unfortunately, we have not, of course, made any acquisitions to date which would allow us to use any sizable portion of the cash that we have. And the potential on the uses of that cash is really something that is unknown.

We do know that the most accretive use of this cash would be to reinvest it into our business through either new licenses, ventures, or outright acquisitions. And our desire is to have that particular use as the use for these funds. Exactly, as a priority since we know that would be most beneficial for our overall business. And I don't believe any specific timeframe has been specified.

We certainly want to be open and available for these opportunities as they come about. I hope that sheds some light. But we really have not determined a specific timetable that we have to use these funds by a certain date. The small special dividend that we did at the end of last year was really a one-time thing at this point in time. And certainly no decisions have been made to do anything more on that regard.

Got it. Terrific. That makes sense.

Can you talk a little bit more just generally about the environment you're seeing? Because the 14% increase in sales in your ongoing brands is so much better than what we're seeing from other fragrance players. And I know you've got great new products out there. But in terms of as we go into holiday, your confidence in the environment generally -- particularly Western Europe, which seems to be very mixed -- your confidence in that strong momentum continuing.

On the advertising side, I know you've talked about increasing the advertising spending all year, so it's not a surprise. But is that simply to promote the new brands that you're launching, or is that in light of maybe increased competitive activity? Thank you.

You have a couple of different questions here. So I'll try to attack each one.

First, with respect to sales, keep in mind that third-quarter sales were up 6%. Some of the difficulty that we see with respect to some of our competitors is a little bit more so on the mass market side of their business. But also just keep in mind, overall, we're up 14% for the first nine months. The guidance is for 15% for the year.

That includes a little bit of organic and a little bit of new product. Karl Lagerfeld, of course, as you know, is one of the brands in our portfolio that we did not have in 2013. And that represented approximately $21 million in sales for 2014. So all in all, from an organic standpoint, we're probably in the low mid-single-digit type of growth for this year. I think that is a little bit reflective of the difficult economies that do exist in certain parts of the world.

When we reported our results for this third quarter, we indicated that most major markets have done fairly well as a global territory. The difficult markets, Eastern Europe, although slightly better in the third quarter than it was in the first half of the year, is still a very difficult market.

(Inaudible)

Exactly.

In addition, Asia is also not quite growing to the extent of the rate that we saw in 2012 and 2013. So far, I think for the nine months, we're up less than 5% in Asia compared to an overall 14% growth rate.

Yes. I think it's important, we would like to give you an idea or smell of what's going on. Markets are, of course, very saturated. The performance, as we view it, will increase our (inaudible) this quarter to 6%. I think it is on track with our internal projections. And that is also a reflection of the (inaudible) in the important growing market of fragrances, which are China and Southeast Asia and Russia. Also, in Russia there was a big problem with foreign currency.

(inaudible) are talking about 20% (inaudible). We did have an impact on purchasing from Eastern Asia and Eastern Europe before Christmas when we get into the high season.

Like Russ said, our business in China is not going at all (inaudible) as it was doing before. So we think that either 6%, 7%, or 8% type of growth this quarter. We are doing maybe better than the competition.

Another thing that you have to take into account is there was a weakness in the euro and the strength in the dollar recently, in the last part of third quarter. We are going to see the impact more in the fourth quarter. But this will have a negative impact on sales and a positive impact on (inaudible), right, Russ?

Yes, that's correct. As I've always indicated, because of the fact that our European operations -- approximately 40% to 50% of their sales are denominated in dollars, while all of their costs are maintained in euro, we normally see a little bit of a gross margin improvement as a result of that. Whereby just translating the euros sales to dollars from a sales standpoint, you'll have a negative impact.

Got it. That's very helpful.

Okay. Did I cover all your points, Wendy? I'm not sure.

I think you did. I think you did. You covered it all, and I feel badly for taking up so much time. That's it for me. I'll follow-up with you after, Russ.

Our next question comes from the line of Joe Altobello with Raymond James.

I'll start there in terms of the FX impact you are seeing. If you look at the strengthening of the dollar since the middle of the year, back of the envelope, I come with about a $10 million revenue headwind for the back half. Obviously, this morning you said you're still comfortable with the $495 million in terms of sales for this year.

But obviously, that revenue number should come at a higher margin; and yet, you kept your EPS number unchanged. So are you spending back some of the higher margin sales that you're having right now?

There is a little bit of that going on. But it's very difficult to pinpoint exactly how the gross margin is going to play. Because when you're in a environment that the dollar is gaining strength, you have selling pressures that sometimes mitigate some of that gain that you get from the gross margin. So it's very difficult to pinpoint that to an exact dollar. Whereas when you're taking sales, it's very simple. You know you are going to multiple it by an average rate.

Most of what we see in the strength of the US dollar recently, keep in mind that most of that will hit in the fourth quarter. FX really did not play a significant role in the third quarter. The average exchange rate was around 1.32 for both the 2013 period, as well as the 2014 period. So it kind of worked out.

As we move forward, I think the most important thing in the whole comment, though, is that we have not reduced our sales guidance, which really implies an increase, as you said, in our guidance as this year has moved on.

(Inaudible)

Okay. In terms of Hong Kong, in the last week, Estee Lauder mentioned that the demonstrations that are going on there have impacted their business pretty significantly. Are you seeing any impact as well?

Yes, we see. But difficult to say that just the demonstration had a direct impact on our [status]. Again, from a macroeconomic point of view, this type of situation (inaudible) when we are going to release our forecast for 2015, which I think will be next week, and then on November 18. We will definitely take into account conflict in the Middle East, pressure in China and in Hong Kong. This represents a strong market for us.

Eastern Chinese customers are traveling less in Hong Kong or in Korea, and it will soon have an impact on our (inaudible). So we are putting all this together in order to have something that is comparative. But in this type of environment, we need to be careful.

Okay. And just one last one, if I could, in terms of Mont Blanc. It was up 40% in 2012 and 2013, and up 40% year to date, which strikes me as not only impressive but remarkably consistent. So how much is left than that brand? I mean is there still a significant amount of growth opportunity in Mont Blanc at this point?

Thank you for this question. I really like it because Mont Blanc is a shining star of our portfolio. (inaudible) which was very important with (inaudible) introduced in 2011. We see it growing in 2014. So three years after the launch, with the introduction of new fragrances in Mont Blanc, it's a great, great sign of (inaudible) and market expectation of this smell. We think, and the way that we are projecting next year, that Mont Blanc will still grow maybe higher than the other brands in the portfolio. We continue to redevelop energy into Mont Blanc.

Same thing for Jimmy Choo. Second quarter, (inaudible) release Jimmy Choo, but we were not (inaudible) that in the third quarter. I think we're going to retain market share for Jimmy Choo. (inaudible) Jimmy Choo and Mont Blanc. We see next year, new launches. Sometimes (inaudible), sometimes (inaudible). So it should be a good year for growth next year.

Great. Thanks.

Our next question comes from the line of Stephanie Wissink with Piper Jaffrey.

Russ, I think this one's probably best suited for you. If you could just talk a little bit about the advertising and promotion spend. Give us some insights into your digital assets and maybe some of the more traditional advertising that you've run that's been effective.

Secondly, maybe a bigger picture question around, I think you referenced earlier a little bit of the saturation in terms of choice accounts in the marketplace around fragrances. Could you give us some sense of how you proceed through the retirement of brands when they may be nearing end-of-life, and how you think about the replacement cycle of some of that revenue? Thank you.

A lot of questions. (inaudible) some more. Go ahead, Russ.

While you're thinking about the digital aspect, more specifically, just to put some numbers, just so we can kind of put a little flavor on it As you know, third quarter we spent approximately 15.5% on advertising and promotion as a percentage of sales. That compared to around 16.5% in 2013.

As we move toward the fourth quarter, I also mentioned that the fourth quarter is usually our largest quarter in overall spend. And we're expecting to spend approximately 24% to 25% of sales on advertising and promotion in the fourth quarter. That will result in an overall approximately 17% full-year spend on A&P as a percentage of sales, and that number is down.

I don't know if you remember; but last year, from continuing brands, we spent approximately 22% of sales in advertising and promotion. So on a comparison basis, we're looking at approximately 17% this year.

Jean, the details of some of the items?

This is (inaudible). We have definitely, in order to maintain or to increase the market share, we will be sending more (inaudible) for the last two quarters, so we think that our percentage of (inaudible) in fourth quarter. And also, in first quarter of next year, we'll be higher than this year. We do we stand with advertising? We spend it across (inaudible) classic type of mediums.

Digital is mostly used for Asia, more than 50% of our advertising in China (inaudible). Because it's a way for us to reach the second-year city and third-year city and an efficient way to advertise in Russia. Otherwise, our use of digital outside of Russia (inaudible).

Retiring brands (inaudible) all the time. All the time, we have a -- because the amount of space allocated to all our brands, (inaudible) we cannot launch one product after another and not clean and make space for new ones.

So all of our franchises are under review when it comes to products. We will be discontinuing some (inaudible) fragrance and introduce new ones. Same thing for our Lanvin, where we have a lot of (inaudible) special edition. In order to continue to invest in this type of operation, we have to have a discipline when it comes to retailing.

The only thing I will add on retiring products is, keep in mind that many of the brands that we have in our portfolio are brands that we've taken over from former licensees. And in many cases, the line itself is in dire need of a revamping and a rejuvenation. Mont Blanc is a perfect example. I think we pretty much discontinued almost all of the predecessor fragrances that existed in that line. The whole idea --

(inaudible) for instance, when we launched (inaudible) and (inaudible), we will be discontinuing 75% of the existing fragrance that were under the former licensee agreement.

Yes, so that's an ongoing part of the evaluation of our businesses. For brands that we create, we try not to; but we're not 100% perfect. Not every brand that we launch or every fragrance that we launch is the success that we want it to be. And it's a constant process overall to reevaluate the portfolio to put the best foot forward.

Good question. Thank you.

Thank you. Good luck.

Our next question comes from the line of Linda Bolton Weiser with B. Riley.

Hello. Just a little question on the numbers first. Your royalty rate was up year over year in the quarter for the third quarter. And I guess I'm not understanding that because Lanvin, which is your one owned brand was actually up, whereas it had not been growing as much earlier in the year. So why wouldn't that favorably affect the royalty ratio? So that's my first question.

You are correct; the royalty rate is high in the third quarter. We've indicated in the quarterly report that was filed yesterday that there was a small adjustment for our liability to our former licensee, Burberry, in connection with the royalty approval. And that hit us in this third quarter. Ordinarily, we have been running a bit lower.

This quarter, it came out to 7.2% of sales. It normally should be around 6.3%, 6.4%, 6.5% of net sales, depending upon product mix. But you're absolutely right. It is a one-time adjustment based upon the evaluation of some estimates that we had.

Okay. Thanks for that explanation.

I'm just kind of curious strategically what you're thinking about the US-based business. It seems that it's become more similar to the European business in the sense that it's prestige brands. I'm just curious about what you're doing with your partnerships with retailers.

Are you still pursuing that strategy? And Gap now, are the sales mostly international? Or do you still have a sales base of some size in the US on the Gap and Banana Republic? Thanks.

I'm going to answer your last question first. Just with respect to Gap and Banana Republic, Banana Republic we sell products through their chain-type stores here in the United States and North America, as well as internationally. The Gap business, we have been, at least for the past year, only been selling on an international basis; and that will continue for 2015. It's not a significant amount for us. Whether it will continue beyond that, more likely than not, it will not continue beyond 2015.

But the overall picture with respect to specialty retailers, it's really an opportunity situation. If we have an opportunity to open up new and additional accounts, we are certainly not adverse to doing so. One of the biggest advantages that we've seen, though, is the ability to take some of this specialty retail and move it into international channels. And that is really what kind of opened up the door to even potential licensing activities with brands that are not typically known as specialty retailers.

Yes, I would like to answer. Our business in the US for all the brands in general -- our sales of Mont Blanc, of Jimmy Choo, through US department stores -- is quite satisfactory. For us, US, North America, and South America are overperforming compared to other territories.

Russ, if you can tell us what (inaudible) adjusted in the US, if you have it?

So we see no weakness at all. We see strong activity in the US, either department stores or the specialty stores. Of course, our spending is very high in the US. So the US department store is not (inaudible) gaining visibility for markets like duty-free where we make (inaudible). I think the number for percentages by 25% of overall sales are in the US.

Did I answer your question, Linda?

Yes, I think so. Thank you.

(Operator Instructions)

Our next question comes from the line of Frank Camma with Sidoti.

Just one clarification on the promotion spend here in the fourth quarter as it compares to last year. Obviously, you're projecting it down pretty significantly on both percentage and absolute rate. Is that simply because of the number of launches? I just didn't catch that part.

Is it the timing of the launches or the support you're pulling through this year? I just wasn't clear on that.

It had a little to do with a lot of different details. But most important is, if you remember last year, at least with our biggest brands -- Jimmy Choo, Mont Blanc, and Lanvin. The growth rates that we were seeing were much greater than we had originally projected during the year. And that's what led to the increase in our guidance, six, seven times throughout 2013.

As Inter Parfum has always said, once we see that our sales momentum is moving greater than what we originally planned, we try to throw more money behind it to keep that momentum going. As we moved into 2014 -- and, yes, we have stayed with our guidance throughout the year. And there's an implied increase, of course, because of the FX exchange rate. But we're not seeing the kind of growth rates that we did see.

It's much more in line with our existing expectations. So we're not going to just throw more money behind that because we need to be able to sustain our operating margins. And we think that a 24%-25% sales in the fourth quarter is high. And those numbers just imply 17%-17.2% or so for full-year spend. That's where the numbers are coming out. And we will evaluate 2015 once we start putting our plans together for 2015.

Okay. Good.

The other question is just a modeling question here. The tax rate, obviously better because of where you had booked the income. Is that a permanent shift; is that a one-time thing? How should we think about that?

Some of it will be ongoing, especially because so long as New York state and New Jersey continue to change the allocation factors or to continue the allocation factors, which concentrate sales much more so than property or other type of factors. That is what accounted for most of what we saw here in the third quarter. But keep in mind, we're normally somewhere right around that 35% tax rate for the year.

We may see a slight improvement. But you're always going to see an adjustment, if there's going to be one, usually in September, when we actually true up, if you will. Because we actually file our return in September, so we know exactly what the end results are going to be. So you have a true up in September. But I think that overall, you're going to see a little bit of an improvement as time goes on with the overall tax rate.

Got it. Thanks.

It appears we have no further questions at this time. I would now like to turn the floor back over to management for closing comments.

Thank you very much, Operator.

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

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.