Interparfums Inc (IPAR) 2014 Q4 法說會逐字稿

Greetings and welcome to the Inter Parfums fourth quarter 2014 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.

I would now like to turn the conference over to Russell Greenberg, Executive Vice President and CFO. Thank you. Please go ahead.

Thank you, operator. Good morning, and welcome to our 2014 fourth quarter and year-end 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 that 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 included in this presentation is an important supplemental measure of operating performance to investors.

The information required to be disclosed for the presentation of non-GAAP financial measures is disclosed in our 2014 Annual Report on Form 10-K, 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 sales of prestige and specialty retail fragrance products, as well as travel amenities, all conducted through our wholly owned domestic subsidiaries.

This should be the last conference call where I have to start with a brief history. But, for newcomers, here we go. In the 2012 fourth quarter, our Burberry license was terminated, and Burberry paid us a $240 million early termination fee.

We also had entered into a transition agreement to operate certain aspects of the business during the first quarter of 2013, which resulted in unusually high 2013 first quarter sales, gross margin, operating margin, and net margin.

Then in the 2013 second quarter, the sale to Burberry of all of our remaining Burberry inventory depressed gross margins for that period. So, keep in mind that, as I review year-over-year comparisons, also when I speak of ongoing brand sales, I am excluding Burberry brand sales from 2013. Starting in the second half of 2013 and for all of 2014, our net sales are exclusively ongoing brand sales.

So, now, moving on to fourth quarter results, net sales increased 18.6% to $125.1 million from $105.5 million. At comparable foreign currency exchange rates, net sales increased 25%.

European-based operations generated net sales of $93.6 million, up 19.3% from $78.4 million. Sales by US-based operations were $31.5 million, up 16.4% from $27.1 million.

Gross margin was 59.4% of net sales compared to 57.3% in 2013. SG&A expense as a percentage of net sales was 55.9% as compared to 67.6%.

Operating income increased to $4.4 million as compared to an operating loss in 2013's fourth quarter of $10.8 million.

Net income attributable to Inter Parfums Inc was $3.3 million, or $0.11 per diluted share, versus a net loss of $4.2 million, or $0.13 per diluted share in 2013.

We have reviewed sale drivers in our Q4 news releases. So, I will move on to other P&L points.

Our gross profit margin was 59.4% of net sales, up from 57.3%, which for our European-based sales, was primarily attributable to the strength of the US dollar relative to the euro in the fourth quarter of 2014 as compared to that of the corresponding period of the prior year.

For US-based operations, there was a higher concentration of prestige brand product sales, which generate higher margins than specialty retail products.

Selling, general, and administrative expense as a percentage of sales was 55.9% for the 2014 period. And that compares to 67.6% for the 2013 period. In 2014, 25% of net sales was attributable to promotion and advertising, while in last year's fourth quarter, 34% was for promotion and advertising.

As some of you will recall, we made a major investment in the advertising promotion behind our largest brands in the fourth quarter of 2013 to support new product launches and maintain sales growth momentum.

For the full year, net sales increased 15.3% to $499.3 million from 2013's ongoing brand sales of $433.1 million. In 2014, net income attributable to Inter Parfums was $29.4 million or $0.95 per diluted share. In the prior year, we had an exceptionally profitable first quarter, as I noted earlier. And that helped spur 2013's net income attributable to Inter Parfums Inc to $39.2 million, or $1.27 per diluted share.

In 2014, we generated cash flows from operating activities of $36.6 million, further strengthening our already very solid financial position. In addition to no long-term debt, we closed the year with a working capital ratio of 4.7 to 1, with $383 million in working capital, including $280 million in cash, cash equivalents, and short-term investments.

The strength of our balance sheet is one of the reasons why our Board of Directors authorized an 8% increase in the annual dividend to $0.52 per share. Our next quarterly cash dividend of $0.13 per share will be paid on April 15th, 2015, to shareholders of record on March 31st, 2015.

Moving on to our 2015 guidance, as we reported yesterday, because of the continuing -- the continued strengthening of the US dollar versus the euro, we adjusted our 2015 sales guidance to approximately $470 million. In constant dollars, our 2015 sales guidance implies a 7% sale increase from 2014.

As we also reported, our earnings are positively affected by a strong dollar because approximately 40% of net sales of our European operations are denominated in US dollars, while almost all costs of our European operations are incurred in euro. We are therefore increasing our net income per share guidance range to $0.98 to $1 per diluted share from our previous guidance range of $0.95 to $0.98 per diluted share.

Our guidance assumes that 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 we said in the 10-K filed yesterday, I'm sure you will find some items of special interest. But, the one section that especially delights me is ongoing brand net sales to customers by region.

In that section, you will see that all regions where we sell achieved year-over-year growth, not just the three largest markets, which are Western Europe, North America, and Asia that we highlighted in the news release. I'm talking about the other regions, the Middle East, the Central and South America, and even Eastern Europe. So, all these regions were up in 2014. And I hope that you are impressed as I'm delighted.

As we have reported, we have a number of launches in the work -- are planned this year. This includes the new fragrance for Oscar de la Renta called Extraordinary that we'll be launching next month at Macy's (inaudible) dealers and which is supported by national advertising in major US magazines.

Simultaneously, the new scent will roll out (inaudible) in the Middle East, Southeast Asia, Canada, UK, Spain, (inaudible).

We have also a new sent for Dunhill called Icon, Dunhill Icon, which was recently launched at Harrod's in London and has been doing very well. You may want to Google our Icon model Andrew Cooper and fantastic photography that Annie Leibovitz did for the ad campaign, which will be seen in major men's magazine as well as billboard and ad campaigns in major airports worldwide. Icon is also debuting in duty-free locations in Continental Europe, Russia, and Dubai.

The distribution of Shanghai Tang (inaudible) Collection will begin in Hong Kong very shortly, and broader distribution will ensue.

As we have said before, we also have new fragrances for Montblanc, for Lanvin, for Jimmy Choo, for Van Cleef, and for Anna Sui. If you have more questions later, I will answer in detail on these launches. We are also quite a few (inaudible) addition scents, (inaudible), and holiday programs that will come to market this year.

Our US operation has become a larger piece of the Inter Parfums pie. And that business has been evolving. One of the points we made on our last conference call was that prestige brands have become a more dominant part of our US operations. Our newer names, Oscar de la Renta, Agent Provocateur, Dunhill, or Shanghai Tang, prove that point.

Having said that, the two newest additions to our portfolio, Abercrombie & Fitch and Hollister, are well-known American specialty retail.

On our last call, I said something like this. While we are looking to partner with specialty retail, the traditional model may make way for a new one, depending upon the brand and its geographic reach. That is exactly what is happening, at least initially with these two brands. We're decreasing fragrance programs for international distribution rather than for the domestic stores. While this arrangement may be subject to change for (inaudible) for 2016. And again, if you have more questions on Abercrombie distribution, I will answer later.

In recent weeks, there was a breathtaking report regarding the new fragrances, launch of new fragrances. And the report mentioned that 1,620 new fragrances were launched in 2014, 1,620, including 925 women's fragrance and 353 men's scents and 342 unisex fragrances. They represent new fragrances added to an already crowded universe of scents.

I'm sure you will agree with me that, without a good reason to exist, most of those fragrances will be gone within a few short years. So, by identifying and concentrating in the most receptive markets and territories where our brands are known, we execute highly targeted launches that capture the essence of the brand in an effort to avoid this fate and allow our new fragrance launches the ability to withstand the test of time.

Before moving on to your questions, I want to repeat some of the unique strengths of our company. We have an infrastructure able to support a significantly larger business. We have also diversified a dynamic portfolio. And we have a global reach into 100 countries.

Add to that an extremely strong balance sheet, as Russ mentioned before, with something like $280 million of cash and an impressive track record of developing and commercializing successful new products that enhance the brand of our fragrance partners and expand their brand reach.

All of this means that we are all prepared to grow our business for brand expansions as well as by expanding into new brands for licensing, partnership, joint venture, or of course, acquisitions.

So, with that, operator, you can open the floor for questions. Thank you.

(Operator Instructions). Wendy Nicholson, Citi.

Hi, good morning. I have a couple questions. The first one is with regard to your outlook for the 7% constant currency revenue growth in 2015. Can you give us a sense for what you think the industry will grow at next year, in other words, how much faster than the industry you think you can grow?

Russ, you can try.

Yes, historically, the industry itself, they say that they grow on average of somewhere right around 3% on a worldwide basis. And that 3% is probably in volume as opposed to dollars.

So, in this business Inter Parfums has historically consistently outpaced that of the overall industry. We are approaching 2015 with a little bit of conservatism, as we've mentioned in prior conference calls. Growth rates that we had seen historically in certain territories, like Eastern Europe and China, are not where they were, at least for our business, as where they were in the past.

So, for us, 7% is well below our compounded annual growth rate. But, it is something that we believe is clearly makeable and doable from a constant currency standpoint for 2015.

And can you talk about your growth specifically in the US, because that does seem to be a market where there maybe seems to be little bit better consumer spending environment? So, if I compare -- and I know apples to apples is very hard right now, but your growth in 2014 to 2015 in the US, would that be accelerating, decelerating, similar?

I can try to answer on that. I think, specifically, in the US, I think our growth -- we will be able to maintain our growth, which is higher than in other countries. We have a lot of new fragrances in the -- launching in the US, meaningful.

Of course, Oscar de la Renta, as I mentioned, is extraordinary. We think also that we will be able to introduce Dunhill Icon at Neiman Marcus probably the end of the year. I would like also to emphasize in general that Montblanc is performing extraordinarily well in the US market because Legend is now in the top 10, has entered the top 10 men's fragrance in the US market. So, our growth in the US will be, I would say, higher than 7%.

Wonderful. And then my last question, Russ, if I understood it right, one of the reasons the growth margin in the fourth quarter was so strong was the mix shift to prestige doing a little bit better. Do you think that -- was that unique to the fourth quarter, or will that carry through into 2015? And I'm really drilling down to try to get a little bit of guidance on the gross margin line for the year.

Absolutely. As I mentioned in the conference call prepared remarks, there were really two main reasons. One, when you look at our European business, the strength of the dollar in the fourth quarter clearly had a much more significant impact into the gross margin raise than the switchover in the United States to more prestige product versus specialty retail.

But, the specialty retail product is clearly -- this is an area that the -- has been in a little bit of a decline. And most of the United States prestige -- the business is moving more, as Jean said, to those prestige lines, like the Oscar de la Renta, Dunhill, Agent Provocateur, etc.

Wonderful. Thank you. That's very helpful.

Thank you. Thank you, Wendy.

Stephanie Wissink, Piper Jaffray.

Hi. Thanks for taking our question. This is actually Maria Vizuete on for Steph. We just had a couple of quick questions. Just going back to Wendy's prior question, can you discuss the underlying growth rates this year relative to last year? I think the underlying growth rate was about 16% last year. Can you just maybe talk about the drivers between the two years? Thank you.

Well, the growth -- if we're talking about North America or United States, North America was actually up around 14% in 2014. The drivers themselves are the brands. We have consistently seen acceptance of our products into those major department stores here throughout the United States.

Brands like Montblanc, which is growing at a 40%, brands like Jimmy Choo, which is growing at a little bit less of 9% or 10%, and some of the newer brands that are in our portfolio in 2014, such as Oscar de la Renta, is clearly what's stirring that particular growth rate.

Got it. Thank you.

I would like to -- if I may, to give a -- to answer Russ. Montblanc in 2014 has seen a great increase. If I remember, the increase was over 30%. So, we are reach -- Montblanc became in 2014 the number one brand in Inter Parfums, the number two being Lanvin, number three being Jimmy Choo.

But, what is interesting for 2015 is that we are continuing launching new products under Montblanc because we will be rolling out the Emblem, which is the men's fragrance from Montblanc. And we'll be launching a very important initiative with Lady Emblem, which is a women's fragrance under Montblanc.

So, it's -- we are looking at growing in 2015 a business that is already very high for Montblanc. And if you let me continue, I will tell you also that Lanvin and Jimmy Choo will see new launches in 2015.

So, we think that, as you know, it's still the beginning of the year. We mentioned an increase of 7% this year, which we think it's conservative because the world situation is quite unstable in certain regions Russia or the Middle East. So, we have to be prudent. But, we have in our pipeline great products. So, if the market responds well, we could do better than that. That's what I wanted to add.

That's very helpful. Thank you so much. And then just a quick question, just on the advertising and promotion line for 2015, can you maybe just talk about maybe what your goal is there and then what kinds of programs you may employ? Thank you.

Well, from a percentage of sales standpoint, 2014 came in at around 17%, 17.4% as compared to 2013 of 16.7%. Moving into 2015, I think that, overall, the percentages are going to be higher.

Part of it is also a reflection of the exchange rates, all right, the benefits that we see from a -- from the larger brands, the ones that are in our European portfolio. The percentage on advertising, because of the way the dollar works, we will probably see a higher percentage of A&P spends on those particular brands.

So, the trend is going to be for a little bit of a higher percentage in 2015. I can't pinpoint an exact amount at this point in time. But, this goes into the business decisions that need to be made when you have currency fluctuations to the extent and we have and that we've seen recently with respect to the euro-dollar exchange rates.

Jean, as far as how we spend the advertising, do you want to -- ?

-- Yes, we spend the advertising -- most of the increase will go to continue the momentum on the largest brand in the Company. But, we have also to really invest on the TV advertising for Dunhill, cable TV in certain markets, and also for Oscar de la Renta.

So, basically, we have -- we're going to have a benefit from the appreciation of the dollar. Part of this benefit, we're going to -- is going to go into incremental bottom line. But, part of it, we want to use it to increase our media and advertising budget.

Thank you. And then just lastly, can you just help us think about maybe the strategy behind specialty retail partnerships? Obviously, it was (inaudible) outperforming those categories. It's been in decline or a little bit underperforming (inaudible). Can you just help us think about that as a strategy longer term and what your thoughts are there? Thank you.

I can try. We think that, with the new signing of Abercrombie, we have really the best of the best of the specialty, what we call specialty retail business. But, let's not forget that Abercrombie has signed an agreement with Inter Parfums in order to -- especially outside of the US -- go out of their stores and sell to perfumeries and department stores. And we have the ability through our network to sell in all these countries and all these stores.

Abercrombie is much more than a retailer. Abercrombie is a trademark. It's a brand. It's a desirable brand that went through some issues and some slowdown in the US and also outside of the US from a clothing point of view. But, the fragrance and the reputation that they have for their existing fragrance is intact and is very high.

So, I can tell you that the many, many markets are waiting impatient, are waiting for our new -- the new products that we are going to come up for Abercrombie and also for Hollister. We are looking at -- this launch will happen in first or second quarter of next year.

Thank you so much, and best of luck.

Thank you.

Joe Altobello, Raymond James.

Thank you. Good morning, guys.

Hello, Joe.

Wanted to start off -- hi. Just wanted to start off with the Abercrombie and Hollister licenses. Can you remind us, is there a sales impact in 2015 because I think you have taken over some existing distribution, first off?

And then secondly, what is the opportunity to sell those fragrances in their own retail doors, because you sort of alluded to the opportunity, but didn't sort of spell out what could happen there?

Russ, you want to answer?

Yes. For 2015, we will have some -- a small amount of sales as we are doing a test in certain international markets with respect to Abercrombie's existing fragrance. But, most of what we're really gearing for and in development for is new fragrances that will be launched worldwide in many, many territories around the world to build an international distribution based upon the name recognition and the brand name recognition of both Abercrombie & Fitch as well as Hollister.

Getting to the second part of your question, in our agreement with Abercrombie, in essence, what we're hoping it's going to evolve into is we become the development arm of new product development for product that will not only be sold internationally, but also will be sold in their stores.

They have the right to buy the product for their stores if they want it. As time goes on, we really don't see why they would not. Again, they have a major player in the fragrance business of Inter Parfums as their development center. So, the goal is to develop product that will eventually be sold in their stores, although unless they say they want it, we're not going to project sales for it or anything along those lines. But, we are building for that particular purpose.

Okay. Thanks, Russ. And then secondly, in terms of the market for new licenses, the Abercrombie and Hollister licenses I think were the only ones you guys added in the last 18 months or so. Is there a lot going on from that perspective? And how big of a license could you guys take on today? Could you guys take on a Burberry-sized license, for example?

I can answer on Burberry. Can we take a Burberry-sized license? I don't know if you remember, but when we terminated our relationship with Burberry, we decided to keep our team intact. We didn't let go of any substantial amount of people. So, we have all these sales and marketing persons in the Company.

So, we definitely -- and as I said before in two or three conference calls regarding this subject, Inter Parfums can manage much more business than what we have today with the same amount of people, with the same group that we have.

So, I hope that, in the next weeks or months, we'll be able to increase our portfolio of brands. Russ, do you want to comment?

Yes, Joe, you're right. December is when we signed Abercrombie & Fitch and Hollister. And 2014 was a relatively quiet year from the standpoint of signing. But, it doesn't mean we haven't been actively pursuing. We are currently looking at quite a few different opportunities. Exactly when something will be done, we can't predict. But, I can guarantee you that this is priority one for Inter Parum.

Great. Thank you, guys.

Thank you. Any more questions?

(Operator Instructions). Linda Bolton Weiser, B. Riley.

Hi, guys.

Hey, Linda.

Hi, Linda.

So, can I -- hi. So, can I ask you about -- you alluded to the major launches in your brands that'll be occurring this -- in 2015. Can you just -- in case I missed what you said, can you just give us the rundown of which of the major launches are in the first half versus second half of the year and then maybe comment on the cadence of the sales growth through the year because you had easier kind of comparisons in the first half.

In the first half you have easier comparisons. And it gets a little harder. So, should we put higher growth in the first half or just even or higher in the second half? I'm just trying to get a little insight on that. Thank you.

We hate to give a breakdown by quarter, especially because more and more, we give some exclusivity to certain retailers in certain markets for a month or two or three, and then we roll out. But, as I said, the Montblanc Emblem for women will happen in the second half. And it's an important launch.

On Lanvin, there is -- in spring, we launch Eclat d'Arpege for men. That's an important launch also. In summer, we're going to have another fragrance for Lanvin.

For Jimmy Choo, we will have -- we will roll out -- continue to roll out Jimmy Choo for men, who has been very successful in the US, in the UK, almost everywhere. And we'll have an important new fragrance towards the end of the year.

So, it's quite balanced with -- let me remember -- Oscar de la Renta. Yes? I'm sorry. Yes?

I was just going to -- we have a few other launches, Oscar de la Renta, which is going to start in spring, Dunhill, with the Icon to Dunhill, which just already started in first quarter of 2015.

So, you have -- in 2015, you have activities in every -- in each and every quarter I guess.

Yes. But, as Jean said, it's very important. It really does build up over time from the standpoint of many of these launches will have an exclusivity to particular retailers in certain countries for a short period of time until it really rolls out as the year goes on.

Okay. Sounds good. And then can I just ask you about the currency, the euro impact? I just want to make sure I totally understand. I understand how, in a weakening euro environment, your bottom line impact is much less negative than the impact on the top line. But, would you rather, from the bottom line earnings perspective, have a flat euro, or do you prefer a declining euro? You understand what I'm asking, like -- ?

-- I understand exactly what you're asking, but your assumptions are wrong. From a bottom line standpoint, when the euro is declining in value or the dollar is strengthening, it actually creates more profit. But, the key is that there are many other things that are happening simultaneously.

For example, and this occurs because of the fact that Inter Parfums SA sells to -- 40% of their sales are sold to customers in dollars. All right? But, all of their costs are in euro. So, there's a huge gross margin impact.

However, what mitigates that is it becomes very expensive for their customers to buy the product, number one. All right? So, there -- you have to take that into consideration. And number two, because of margin impact, there's a tendency to increase your spending, which is exactly what I said when I answered the question earlier as to what I think is going to happen to A&P or advertising and promotion as we move into 2015.

And then there is a balance that, of course, ends up on the bottom line. So, no, we don't really want to see the dollar getting extremely strong. It creates a problem for overall business. We would love to see it at a consistent rate. But, in this particular environment where we've watched it go from -- I guess in September, from almost $1.4, $1.35 to euro to at the end of the year, where it was at around about $1.2, and now it's at -- well, God, it's like $1.05 or $1.06. That does create more profit for us with respect to those sales that our European subsidiary does in US dollars.

Yes. Okay. I understand.

I agree. I agree with you, Russ.

Thanks. And -- .

-- And if you need more explanation, we can always talk offline. And I can walk you through the scenario.

No, I understand. And then finally, I think that your royalty rate was a little bit higher. I think this might've -- maybe this was explained in your 10-K, but I didn't quite catch it. Can you explain the royalty rate being -- I think it was 7.9% in the quarter, seems a little high. And going forward, is 6.5% good, or is 7.0% a better ratio, or -- ?

-- Yes. As we explained in the quarterly report, there's an accrual similar to what happened in the third quarter. In 2014, there's an accrual of a little bit of a contingency that might be due to a former licensee -- licensor I should say. If you X that out, the royalty rate is around 6.7%.

So, it's a number we should use for next year?

The number should be right around the 6.7%, maybe a little bit less, just right around that number. That's where we are on an absolute comparative basis.

Okay.

Okay. Thanks a lot, guys.

Thank you.

Thank you, Linda.

That concludes today's question-and-answer session. I'd like to turn the floor back to management for closing remarks.

Thank you. Before signing off, I just want to mention real quickly that I will be presenting next week at the Sidoti Small Cap Equity Conference on March 16th in New York. I hope to see some of you there. I will also be presenting in mid-May at the B. Riley Consumer Conference in Los Angeles and in late May at the Citi Bank Consumer Conference here in New York. In June, I'll be participating in the Raymond James Boston Spring Investors' Conference and the Piper Jaffray Consumer Conference, which is here in New York. I hope to see some of you at those events.

Thank you for your participation on this conference call, whether you are live or listening via Webcast. And if you have additional questions, I am available by phone. Thank you, and have a great day.

Thank you. Ladies and gentlemen, this concludes today's teleconference.