Interparfums Inc (IPAR) 2015 Q2 法說會逐字稿

Greetings and welcome to the Inter Parfums, Inc. second-quarter 2015 conference call.

(Operator Instructions)

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

Thank you, operator.

Good morning, and welcome to our 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 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. 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 S.A. When we discuss our United States-based operations, we are primarily referring to sales of Prestige and specialty retail fragrance products, as well as travel amenities that are all conducted through our wholly-owned domestic subsidiaries.

Moving on to our second-quarter results, net sales were $102 million, compared to $118.2 million. In dollars, the decrease was 13.7%, but at comparable foreign currency exchange rates, net sales decreased 5.3%. European-based operations generated sales of $77.1 million compared to $94.7 million, for an 18.5% decline in dollars and an 8% decline using comparable foreign currency exchange rates.

Sales by our US-based operations rose 6%, to $24.9 million from $23.5 million. Gross profit margin was 59.1% of net sales compared to 57.6%. SG&A expense as a percentage of net sales was 51.1% compared to 46.8%. Operating income was $8.2 million, compared to $12.9 million, resulting in an operating margin of 8.1% of net sales compared to 10.9%.

Net income attributable to Inter Parfums, Inc. was $4.4 million, or $0.14 per diluted share, compared to $6.1 million, or $0.20 per diluted share. Thus, for the first half of 2015, we generated net sales of $211.3 million, compared to last year's $239.9 million. While that is a 12% drop in dollars, at comparable foreign currency exchange rates, net sales decreased 4% for the first half.

Net income attributable to Inter Parfums Inc. was $14.4 million, or $0.46 per diluted share, in the current first half, compared to $15 million, or $0.48 per diluted share, for the same period one year earlier. As we have covered second-quarter sales drivers in our news release, I will focus on certain P&L points.

The increase in gross profit margin for European-based sales was primarily attributable to the strength of the US dollar relative to the Euro. The average dollar/euro exchange rate for the three months ended June 30, 2015, was 1.11, as compared to 1.37 for the 2014 period.

Although some quarterly fluctuations occur due to individual product mix and sales, the overall trend of increased gross margin for our US-based operations is due to a greater concentration of higher-margin Prestige brand product sales, as compared to lower-margin specialty retail and mass market product sales. Selling, General, & Administrative expense, as a percentage of sales, was 51% for the current second quarter, compared to 47% in last year's second quarter.

The increase in SG&A expense as a percentage of net sales reflects reduced absorption of fixed costs in our European operations, due to the lower sales levels during the quarter. In the US business, SG&A as a percentage of sales was flat with the prior year, as royalty and advertising expense rose proportionately to the sales increase, particularly for our newer Prestige product licenses, such as Oscar de la Renta and Dunhill.

Promotion and advertising, included in Selling, General, & Administrative Expenses was 17.2% of net sales in both the current second quarter and in the second quarter of 2014. I should point out that similar to last year, a significant portion of our 2015 advertising spend is budgeted for the second half of the year. As a result, our operating margins declined to 8.1% in the current second quarter, from 10.9% in last year's second quarter.

There were no major changes in non-operating items such as interest expense, and income, or foreign-currency loss. However, our tax rate returned to a more normalized level of 34% in the current quarter, versus last year's 41%. This is because our European-based operations are now using an effective annual tax rate to estimate taxes for interim periods.

Our financial position remains very strong. We ended the second half of 2015 with a working capital of $342 million, including approximately $229 million in cash, cash equivalents, and short-term investments, for a working capital ratio nearly 4 to 1.

The almost $90 million of long-term debt on our balance sheet relates to the five-year term loan we recently entered into to finance the Rochas acquisition. As you may have read in the 10-Q, which we also filed this past Friday, to reduce exposure to the rising variable interest rates, we also entered into a swap transaction effectively changing the variable interest rate to a fixed rate of approximately 1.2%.

Turning to our outlook for the year, we expect 2015 net sales of between $460 million to $470 million, resulting in net income per share attributable to Inter Parfums in the range of $0.95 to $1 per diluted share. This guidance reflects our expectation that some of the negative market conditions that we've seen in China and Eastern Europe that prevailed in the first half of this year will continue for the remainder of 2015. And as always, our guidance also assumes that the dollar remains at current levels.

Jean, please continue.

Thank you, Russ and good morning, everyone.

Some of the points made in our second-quarter earnings release are worth further explanation. As we reported, Jimmy Choo was our leading brand during the quarter, thanks, in great part, to the early success of Jimmy Choo men, especially in the US, plus the launch earlier this year of Jimmy Choo Blossom for women and the steady performance of the Jimmy Choo signature line in general. This led to the 62% increase in sales in local currency.

In dollars, 19% comparable quarter depreciation of the Euro versus the dollar reduced the growth in Jimmy Choo brand sales to a still impressive 30%. I know we mentioned that the US market for the brand has been quite strong, but Jimmy Choo fragrances are also doing quite well in Western Europe and Asia.

And naturally, we are very optimistic about this summer launch of the third Jimmy Choo woman's fragrance pillar called Illicit. We will have ads running in the US and in UK in September, to be followed by a pre-holiday blitz in November and December in both markets. This will be followed by a European launch exclusively with Sephora in 10 countries, and we will start Asia in January.

Moving on to another important brand for the Company, Montblanc. The weakening of the Euro also had the effect of exacerbating lower sales for this brand, which experienced for the first time a 23% decline in local currency and a 38% reduction in dollars. Montblanc sales also had a very difficult comparison against the highly successful launch of Emblem in the second quarter of 2014.

Our plans call for Lady Emblem to debut during this month, July or August, which should reinvigorate Montblanc sales as the year progresses and also into 2016. Lanvin sales were down 9% and 27% in local currency and dollars respectively, largely as a result of a challenging market environment in Eastern Europe, which was partially offset by gains for the ever resilient Eclat d'Arpege on which we are building with the upcoming launch of Eclat de Fleurs and the recent introduction of Eclat d'Arpege Homme.

For our European operations, Balmain Homme, just debuted last month. And our second fragrance due Karl Lagerfeld called Private Club, will launch in the third quarter. I know we mentioned that the new woman's scent for Van Cleef was on the docket for 2015, but it's been moved now to 2016. However, Ambre Imperial joins the brands collection extraordinaire, and has been doing very well this year.

For our US operation, in the fall we will introduce Romantica by Anna Sui. And for Shanghai Tang, the Silk Road collection is also rolling out, and our newest fragrances for Oscar de la Renta and Dunhill are continuing their global rollout.

While on the subject of US operations, I want to mention that we had a big win in June at the Fragrance Foundation Awards when Modern Man by Banana Republic took home the award for men's fragrance of the year in the popular category. In the highly competitive fragrance arena, with hundreds of new entries every year, it's a great honor to be recognized by our industry for excellence.

As compared to past years, 2015 has been a little lighter on launch activity. However, both in the US and in Europe, 2016 will be considerably more active for product launches, including some for newer brands such as Coach, Abercrombie and Fitch, and Hollister. And we'll talk about that in our next conference call.

With regards to Rochas, integration and business development activities are underway. As we announced in our press release on June 1, we acquired the Rochas brand, covering all brand names and registered trademarks for beauty and fashion. About 95% of the Rochas business is fragrance and fashion accounts for the rest, conducted through 10 licensees.

About 60% of the fragrance business is done in Spain and France. Under PNG ownership, the fragrance business did about $45 million per year. When we took over the brand, there was very little inventory, so restocking is job number one.

Our medium-term strategy for fragrance is to focus on the lines that generate the most business. For example, we need to overhaul the advertising and promotion for all the Rochas. Also on our to-do list is to rework the packaging of some of the enduring Rochas scents, such as Femme. A broad-based new product launch is being prepared for early 2017.

In the near-term, our focus on [session part] of the Rochas business is on maintaining department store and brand distribution. By year-end, we hope to complete our analysis of that business and develop our business plan accordingly.

With regard to Coach, we'll be taking over existing lines in the summer of 2016 once we have assessed the potential of each. Our plan is to launch our first new Coach fragrance in the fall of 2016. We'll have more to say about our strategy later on, but, in general, we'll be developing new fragrances that capture the spirit of the Coach brand, in an attempt to bring the brand to a larger global audience.

Although we have a great deal on our plate, our search continues for additional names for our fragrance brand portfolio. To repeat, we have infrastructure in place to support a much larger business. We have a very strong balance sheet. We have a stellar reputation built on a track record of success.

We have a great group of creative and inspired individuals who have over and over again developed and commercialized new brands, appropriate products, that enhance the brands of our fragrance partner.

With that, operator, we can open the lines for questions.

Thank you.

(Operator Instructions)

Joel Altobello, Raymond James.

First question, I wanted to go into the US-based gross margin. You mentioned that it was, obviously, up nicely in the first quarter and down fairly sizably this quarter. What was unusual about the second quarter that caused that decline?

Joe, the first quarter, if you remember, we had our initial launch of two new products, Extraordinary for Oscar de la Renta and Icon through Dunhill. We had a huge, a fairly big increase in the pipeline sales. As we moved towards the second quarter, you have continued sales as you continue to roll out those products into other geographical areas.

But the main countries had that initial pipeline launch in the first quarter. And therefore, the sales were much greater in the first quarter as compared to that of the second quarter. And that's going to cause quarterly types of fluctuation. However, as you can see, for the full six-month period, that gross margin in the US operations is still higher as a percentage of sales than it was in the prior periods.

Okay. So should the second half look more like the first quarter or the second quarter?

As we move forward, I think you're going to end up with a blended rate. More like what you see for the six months, as opposed to what you saw in the first quarter. You're not going to be able to repeat that pipeline effect until in future years when you have a new pipeline for the next product launch. You're typically going to see a little bit of a higher margin when you have higher sales because of a pipeline effect.

Okay. So the second quarter was the anomaly, I guess?

It's not the second. The first quarter was more the anomaly. You have much greater because of that pipeline. Second quarter six months is a little bit more of the natural progression of products being replenished on customer shelves.

Okay. Fair enough. And then, moving on to Rochas, looks like you had a little bit of sales from that brand in the quarter. You mentioned in the past that you could have $10 million of Rochas sales this year. First, is that in your numbers at this point?

And then turning to next year, how much incremental should that brand contribute? If it did $45 million for P&G, obviously, you guys are not expecting that. But could it do $30 million next year for you guys?

Russ, you want to start?

Yes, I'll start with the last part of the question first. We don't usually indicate projections on a brand-by-brand basis. Although, we have said that we don't expect to reach the levels, because you're going to be paring down. And I'm going to let Jean continue more that.

But with respect to the first part of your question, as we indicated, there was very little inventory to buy from Rochas. I think the number came out to somewhere around $3 million or so. And some of that are components.

As Jean mentioned in the remarks, our job number one is to get our production up to speed. There was a little bit of finished goods that we did sell. And then, maybe, there's a little bit more that we will be selling over the next three months or four months.

But I think the numbers are going to be really immaterial from the standpoint of Rochas sales in 2015. The key is getting the production up to speed so that we can continue and move product into the marketplace for 2016.

Which is what we have started during the summer, as I said, putting back some inventory. Can we do $10 million? Anywhere between $6 million to $10 million this year, I think it's possible, if and when we have the inventory. But more important is what can we expect next year?

So if P&G was doing $45 million, you mentioned a number of $30 million or $35 million, which we think is a very feasible (inaudible). But the important thing, as I said, is we have some strong market share in France and Spain.

So we'll be capitalizing on that. We'll be working on new fragrance also. That will happen in 2017. So we think that in the next two years, we should be able to be back to where P&G was in terms of level of sales.

Okay. Thanks, guys.

Linda Bolton-Weiser, B. Riley.

In terms of your comment about the gross margin in the US-based business, can you just remind me, I thought the Dunhill icon was supposed to -- the launch was supposed to follow the European launch in the US. I thought it was supposed to be the second quarter of 2015, but can you just clarify that? And why that wouldn't have helped the gross margin, then, in the second quarter? That's my first question.

Yes. Dunhill did launch in the US in the second quarter, except the launch in the US is very muted. It's only in a select few department stores, as opposed to the Oscar de la Renta Extraordinary launch, which occurred in the first quarter, which pretty much hit every major department store here in the United States. So that's the reason that you're not going to have that kind of an effect from a US business standpoint.

Agreed. The business of Dunhill in the US is very small compared to Oscar de la Renta.

Okay. So are you finding that after the initial sell-in on the Oscar de la Renta that the follow-through POS is continuing to be kind of strong? Is it as expected?

What I think is important is to say that we are beating our numbers on Oscar de la Renta for Extraordinary, our internal numbers. And the sales of Dunhill are also above our expectation.

This year in terms of the US market, sales that we generated from the US, the big challenge came from Anna Sui, which was down something like 20% due to some challenges in China and countries in Asia. But that's why we still think that we are comfortable with a sales level for this year of $460 million or $470 million, even though we didn't [need] 200 -- stop me if I'm wrong, Russ, $210 million or $211 million in the first six months.

So it means that we are really expecting the second half to be much stronger. And when I look at the sales and the original shipments of the Illicit for the month of July, we are very confident.

Okay. Thank you. That's helpful. And then, just following on that point about the second half. If I do my math right and I put what you are expecting for the year, it does show you only have to do low- to mid-single digit constant currency sales growth in the second half. However, in the fourth-quarter you had a really strong quarter last year, and your main brands were all up more than 25% in the fourth-quarter last year.

So do you feel comfortable and what does it look like third quarter versus fourth-quarter? Because it sounds like a lot of the launches you're talking about are actually shipping in the third quarter. So how are we going to do in the fourth-quarter when you have those hard comparisons? Thanks.

Linda, we don't normally breakdown sales by quarter by quarter. But from just looking quickly at what you're saying -- and you're right on a constant dollar basis we are looking at low single-digit sales increases. I think it's going to be fairly consistent quarter to quarter, third versus fourth, compared to the prior-year third versus fourth.

We also still do have some significant launches that are still happening in the second half of this year. Jean just mentioned Jimmy Choo Illicit. How that moves out into the global marketplace and how that's received is going to have a significant impact on the possibility of beating the kind of numbers that we have in our guidance.

The three important launches that we are starting in third and, of course, we continue in fourth is new Jimmy Choo, the woman's Illicit, the new Emblem by Montblanc, and the new Lanvin. So you have launch for Jimmy Choo, for Lanvin, and for Montblanc, and these are the three largest brands in our portfolio.

And from what I see from the early sign of sell-in, we do not have any sell-through. We feel confident for the sales this year. For next year, we will have a full year of Rochas, a full year of Abercrombie, and a full year of Hollister.

And we'll have a major launch, which I think will happen more in the second part of 2016, for Coach. So again, these are three new businesses that we didn't have in 2015. So the comparisons for 2016 will be easier than this year.

Thank you.

You agree, Russ?

Absolutely. Thank you, Linda.

Can I do one more question on the gross margin? You explained very well about the US piece. So when you look at the whole Company gross margin, you had 62%-ish in the first quarter, then 59%. So for the second half, I would think somewhere in between those two numbers is a good place to be. Do you want to provide more color on that?

I don't think you're wrong in your analysis. It's certainly not fundamentally incorrect. We saw that the margin increase for our European operations was not as severely high in the second half of the first half versus the first quarter. So I think the blended numbers are what you're going to see for the remainder of the year.

But a lot of that also does depend on what happens in the countries where we did see some weakness this particular period. The China market, the Eastern European market, these are areas where for our European operations we do generate a lot of sales that are in US dollars denominated. And those are what give it that extra pop, if you will, from a gross margin standpoint.

I remember the sales for our European operations, if we're in a strong dollar environment, your sales -- you don't see -- your sales are down, but your margin is up. And your margin is up because those dollar-denominated sales are giving you that extra pop because of the gross margin. So it depends on what happens in some of those areas for the second half of the year.

Got you. Thank you so much.

Steph Wissink, Piper Jaffray.

We have a couple of questions. Maybe you could speak to, first, just the pricing environment globally. And we're curious specifically if there's been any delta in the performance of your tourist or duty-free business, versus some of the mainline retail around the world?

Can you repeat the second part of your question? If we have seen some --?

Any difference in the performance of the tourist or the duty-free location versus the mainline retail store?

No. We do not see a big difference between local market and duty-free market. To make it simple, the Americans are doing well. Europe is selective. Certain countries are doing terrible. And Eastern Europe -- that has always been a strong market for Inter Parfums -- is definitely slowing down.

When I say Eastern Europe, it's basically Russia. The other challenge for us that materialized this quarter was definitely a slowdown in China. And China represents a stronger [month of sales]. But we are taking action by increasing our advertising budget in China, by developing special sizes, and customizing a certain program for China.

I was there not a long time ago. So we feel that we've seen the worst in terms of weakness. We need definitely new products. And we are launching a new Anna Sui as we speak in the third quarter, which will happen in China only at the beginning of 2016.

Lanvin also has very strong sales in China. So in order to fight this weakness, we need to come up with newness a little bit faster for this part of the world.

Thank you. And just a follow-up question on your brand pipeline, I think you mentioned in your prepared remarks several new properties coming into the pipeline next year. Several of them were specialty brands. So can you just give us some sense across the pipeline of things you're looking at, how we should think about the balance between specialty prestige and mass brands?

Next year, for next year it's going to be quite balanced because we're going to add two important specialty brands, Abercrombie and Hollister. And we're going to add two designer brands, Coach and Rochas. So I think, we have not disclosed yet numbers for 2016, but we are expecting good growth from the US and from our subsidiary in France because we are managing Rochas and Coach. So it will be quite balanced between specialty and designer. Russ, you want to add?

Yes, the only thing I would add, and I think it's very important with respect to Coach, Abercrombie and Hollister, that the launches that we are preparing for are worldwide International distribution. It's not the standard specialty retail sales where we are only just selling product into Hollister or Abercrombie and Fitch stores in the United States.

As a matter of fact, we're not selling any product into their stores or the retail specialty, retail environment. So these are products that are really being geared for duty-free International distribution in prestige type distribution.

So from that standpoint, I don't like to bridge that gap between what is the difference between specialty retail and prestige. To us, these new product launches are really prestige product launches.

Okay. Absolutely.

That's helpful, Russ. Could I just ask for clarification? Does that imply that A&F and Hollister will not carry fragrance in their own specialty stores? Or will they continue to direct source?

At the present time, they are direct sourcing. However, they have the option -- and any product that we create for International markets, if they would like this product in their stores, they have the right to put it into their stores.

Excellent. Very helpful. Thank you, guys.

Another thing that I would like to add, as we mentioned, certain weakness in Asia, we are very happy to have next year a new fragrance for Coach, because the name recognition of Coach in Asia is very, very high. So it was a very good move that we acquired this license. This will strengthen our business in Asia as early as next year. Next question.

Hamed Khorsand, BWS Financial.

First off, just a clarification on Rochas inventory. You were talking about the restocking inventory and the channel, right? Is this the channel that Rochas was already in? And what are you doing as far as incorporating that into your own distribution base?

The entire Rochas brand for fragrance distribution, although there was a small amount of overlap between what existed with P&G versus us, most of it was handled by P&G subsidiaries. So we need to revamp the overall distribution and incorporate it into our own existing distribution channels, if you will. So there's a small overlap, but very, very small at that.

With respect to the inventory, as I mentioned earlier, a minimal amount of inventory. Somewhere under $4 million; I think the number was $3.9 million, if I remember off the top of my head.

And that inventory contains some components, so we really do not have significant finished goods to put into the marketplace yet. So at the same time that we're gearing up for production of Rochas product for deliveries either late in 2015, early 2016, we are also working on incorporating that distribution model into our existing distribution network.

Absolutely.

Okay. And my other question is, just looking out into the second half of this year with the guidance you provided, what needs to happen for you to hit the higher end of the range, the $470 million level? What are you assuming there?

I can try to answer. When we give guidance, we like not to give a range -- $460 million to $470 million, $10 million of $460 million, we're talking 2%. So it's a lot, but it's very difficult to be that precise. So what could happen to hit the $470 million? If the sell-through of the new Jimmy Choo and the new Montblanc is good, we will reach the $470 million.

The good news is that we shift a little bit more than expected in July. So if it's sell-through, we can replenish faster and book more sales. But we think it's reachable. It's definitely a reachable number.

Let me ask in a different way, where I'm trying to go with this. Right now the early indications are from the back-to-school season that the high-end retailers are the only ones doing well. The rest of the market has been pretty much benign.

So going out into the holiday season, you're approaching that risk as well from an industry standpoint on retail sales. So I'm just trying to understand, where -- are you expecting prestige to carry the year for you guys? Or is there any specialty exposure here?

The important launches that we have this year, either from the US or from France, are in the prestige environment. So the new Jimmy Choo is only in department stores in US and UK. Same thing for Montblanc; same thing for Lanvin.

And we launched an exclusive program with Harrod's towards the end of the year for Dunhill, the new men's fragrance, which will be exclusively for Harrod's. So all our initiatives are geared for the prestige for the next five months.

Okay. Great. Thank you.

(Operator Instructions)

Wendy Nicholson, Citi.

My question has to do with the probability of further acquisitions in the near term. I know that you financed Rochas with debt because you wanted to remain flexible.

But can you comment at all, first, with regards to the brands that Coty is buying from P&G, do you think any of those might take this over the next 12 months? Or do we have to wait for that deal to close?

And just broadly speaking, what's the acquisition environment like out there? Do you think there's more opportunity to make more acquisitions in the near term? That would great.

Russ, maybe I can try? One thing I would like to say -- and I'm glad that you noticed that if we took a loan to finance the $100 million of acquisition of Rochas, even though we have $200 million or $250 million of cash, it means that we are thinking that in the near future, it's good to keep this cash to buy something. So yes, even though we have today a wider portfolio, the Company absolutely can buy either existing license or trademark or businesses.

Is there any opportunity with Coty buying the fragrance business from P&G? Yes. For sure. There are certain brands that could fit very well our portfolio. But Inter Parfums is definitely looking for growing the portfolio. Russ, you want to add something?

I tend to agree. I think it's going to take almost a year before the acquisition, Coty's acquisition of the assets from P&G are really going to take effect. So we don't know what kind of fallout may exist or may not exist with respect to that.

I think the point that Jean is really trying to make is that we definitely did enter into the loan and keep the cash so that we can be flexible and act relatively quickly, like we did in the Rochas deal, in order to build our portfolio. That is what our goal is.

And the environment itself, I think it's a little quieter right now after the announcement of Coty's acquisition, which we all know was pretty enormous. There are a few small deals that we are looking at. But the fallout from the Coty/P&G deal, we just don't know at this time.

Okay. But fair to say that the cash you have on the balance sheet, you want to keep it there? And remain flexible, as opposed to paying another special dividend or buying back stock or anything like that?

Absolutely.

Perfect. Got it. Okay, thank you so much.

We have no further questions at this time. Mr. Greenberg, I would now like to turn the floor back over to you for closing comments.

Thank you. Before signing off, I want to mention that I will be presenting on August 18 at the BWS Financial Growth and Value Summer Investor Series that is here in New York, and on September 16, at the B. Riley and Co. retail and consumer conference, also here in New York. I hope to see some of you at these events.

Again, thank you for your participation on the call, whether live or listening via webcast. And as always, if you have any additional questions, I am available by phone. Thank you very much, 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.