Interparfums Inc (IPAR) 2015 Q3 法說會逐字稿

Greetings and welcome to the Inter Parfums, Inc. third-quarter 2015 conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation.

(Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Russell Greenberg, CFO and Executive Vice President.

Thank you, sir, you may begin.

Thank you, Operator.

Good morning and welcome to our 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.

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 based operations, we are primarily referring to sales of Prestige Fragrance products and specialty retail fragrance products, which are all conducted through our wholly-owned domestic subsidiaries.

Moving on to third-quarter results, net sales were $138.9 million, up 3.5% compared to $134.2 million in last year's third quarter. At comparable foreign currency exchange rates, net sales increased 11.4%. Sales by European-based operations rose 6.5% to $110.1 million from $103.4 million.

At comparable foreign currency exchange rates, net sales increased 16.8%. US-based operations generated net sales of $28.8 million, down 6.5% compared to $30.8 million. Gross margin was 61.8% of net sales compared to last full year's quarter 56.1%. For European-based operations, gross margin was 64.8% compared to 58.7%. And for US-based operations, gross margin was 50.3%, up from 47.4%.

SG&A expense as a percentage of net sales was 41.9% compared to 42.2%. Net income rose 48% to $27.6 million compared to $18.7 million. Our operating margin was 19.9% in the current third quarter, up from 13.9%. Net income attributable to Inter Parfums, Inc. rose 28% to $14.2 million, or $0.46 per diluted share, compared to $11.1 million, or $0.36 per diluted share.

Thus, through the first nine months of 2015, we generated net sales of $350.2 million compared to last year's $374.1 million. While that is a 6.4% drop in dollars at comparable foreign currency exchange rates, net sales actually increased 1.7%. Net income attributable to Inter Parfums, Inc. rose 9.4% to $28.6 million, or $0.92 per diluted share, for the 2015 nine-month period compared to $26.1 million, or $0.84 per diluted share, for the same period one year earlier.

Jean will expand further on sales and brand activities, so I will focus on certain P&L points. But I preface this discussion by again saying that our reported sales are impacted by changes in foreign currency exchange rates. A strong US dollar has a negative impact on our sales.

However, earnings are positively affected by a strong dollar because almost 50% of net sales of our European operations are denominated in US dollars, while almost all costs of our European operations are incurred in euro. Thus, 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 and nine months ended September 30, 2015, was $1.11, as compared to $1.33 and $1.35, for the three and nine months ended September 30, 2014, respectively.

The overall trend of increased gross margin for US-based operations is also 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, and Administrative expense as a percent of sales rounds to 42% for both the current and prior year's third quarter. For European operations, SG&A expense increased 3.1% in the third quarter, while in constant currency sales were up 11.4%, giving us some nice leverage over our fixed expenses.

For US operations, SG&A expense increased 0.9% in the third quarter because of the growth in Prestige brand product sales that are now under license, which bear royalty and advertising expenses. Promotion and advertising included in SG&A expense was 15.3% of net sales in the current third quarter, as compared to 15.5% in the third quarter of 2014.

As we regularly point out, a greater portion of our advertising spend is budgeted for the second half of the year, with the highest percentage in the fourth quarter. In last year's fourth quarter, for example, promotion and advertising represented approximately 25% of sales. Our promotion and advertising budget for this year's fourth quarter is expected to also be in that neighborhood.

Royalty expense represented 6.8% of net sales for the current third quarter, as compared to 7.4% in the corresponding period last year. We currently anticipate royalty expense to approximate 7% of net sales per year. While some of the changes in nonoperating items did not move the needle much, they are still worth noting. As expected, we had an increase in interest expense amounting to about $500,000, primarily related to the financing of the acquisition of the Rochas brand. And finally, our tax rate was 33% versus 32% in 2014's third quarter.

Our financial position remains very strong. We entered the final quarter of 2015 with working capital of $353 million, including approximately $215 million in cash, cash equivalents and short-term investments, resulting in a working capital ratio of over 4 to 1. The $84.6 million of long-term debt on our balance sheet relates to the five-year term loan we used to finance the Rochas acquisition.

As we discussed in August, to reduce exposure to rising variable interest rates, we entered into a swap transaction, effectively exchanging the variable interest rate to a fixed rate of approximately 1.2%. We continue to expect net sales to be in the range of $460 million to $470 million, resulting in net income attributable to Inter Parfums of $0.95 to $1 per diluted share. Our current guidance factors in negative market conditions in China, Russia and Brazil that have prevailed throughout this year. As always, our guidance assumes that the dollar remains at current levels.

Jean, please continue.

Thank you, Russ.

Good morning, everyone.

Once again, Jimmy Choo was our star performer for the quarter, with brand sales increasing 46% in local currency and 23% in dollars. Jimmy Choo Man, which debuted late in 2014, is in great part responsible. You may be interested to know that according to NPD, the market research firm, Jimmy Choo Man was the seventh best selling men's fragrance in the first six months of this year in the United States.

The launch of the brand's third women's fragrance initiative, Illicit, has begun in the US, in the UK, in the Middle East and Australia. And it is supported by an extensive ad campaign featuring singer and actress/model Sky Ferreira. Here in the US, the new scent is in Macy's, Nordstrom, Sephora, Saks and others. Illicit will debut in Western Europe, Asia and Russia next year.

Regarding Montblanc, Montblanc brand sales for the quarter were given a lift with the launch of Lady Emblem, coupled with the continued success of the Legend collections and Emblem men's lines, which together produced a 25% sales increase in local currency and 5% in dollars. In the coming year, we will be expanding our highly-profitable men's Legend line.

The Montblanc collaboration has been a huge success for us. And we now have many more years to nurture the growth of our Montblanc business with signing of the five-year extension to our license agreement. The original agreement was signed in 2010, and granted us the exclusive worldwide license rights to create for use and distribute parfums and ancillary products under the Montblanc brand through December 31, 2020. The new 10-year agreement extends the partnership through December 31, 2025, under much the same terms.

Now on Lanvin, Lanvin sales rebounded in the third quarter. We were up 7% local currency, but down 10% in dollars, with some of the gains coming from the launch of Eclat de Fleurs and Eclat d'Arpege Pour Homme. Among our mid-size brands, we had also good performances by Boucheron and Paul Smith, where local currency sales were up 34% and over 100%, respectively, fueled by new product launches.

For the coming year, we have plans to launch a new women's and men's scents for Van Cleef & Arpels. And of course, our first Coach fragrance for women will debut next year. The US is the Coach brand's largest market, followed by Japan. So our current plan calls for a near global launch in the third quarter of 2016.

Regarding Rochas, we had some minimal initial sales of Rochas fragrance in the third quarter and even some royalty revenue. So far, we have overhauled the brand website and redesigned some of the fragrance packaging and visuals for the brand. Rochas offices have moved into our Paris Headquarters. And our first new women's scent for the brand is planned for 2017 with a 50-country launch.

Moving now to the US operation for Oscar de la Renta brand, we have Oscar Gentlemen, a new blockbuster fragrance that we'll debut in store next year in the third quarter. We have also a (inaudible) for Extraordinary, the women's fragrance. And also coming to the market are two new Agent Provocateur scents for women and new scents in (inaudible) Anna Sui brand.

We will be launching new scents for young men and women for the Hollister brand internationally, and of course for Abercrombie where we launched a fragrance called First Instinct, a men's scent. And it's scheduled to roll out internationally in July. And the women's version will debut very, very early in 2017. I think we caught up all the brand.

Finally, this is our last conference call for the year. So Russ and I want to wish all of you the very best of the holiday season and the coming year.

With that, Operator, we can open the floor for questions.

(Operator Instructions)

Our first question comes from the line of Wendy Nicholson from Citi. Please go ahead with your question.

Good morning. This is Samantha Parker filling in for Wendy today. I'm hoping you can provide a bit more color -- good morning. We're hoping to provide a bit more color on margins. What happens when the dollar stabilizes or falls, and how should we be thinking about that moving forward?

Well as, -- yes sure. As we move into 2017, or 2016, it appears that the entire year is going to end with an average exchange rate of somewhere right around that $1.1, $1.11 that I had mentioned earlier. So the comparison to 2014 where the average was between $1.33 and $1.35, that is what gave rise to this year's almost over 500-basis point increase in the gross margin for our European operations. As we move into 2016, if we assume that the dollar remains at the current levels, you're going to see the gross margin should level off at the same level where it was for the 2015 full year.

And when we issue our guidance, which is going to happen next week, we're going to probably assume again that the dollar stays at current levels. And that's how we're going to build our guidance for next year. So in that environment, unless there's going to be any more huge volatility, we would expect margins to stay relatively stable as we move from 2015 to 2016.

Got it. In terms of margin expansion going forward, excluding those currency impacts, will faster growth for Prestige brands drive a favorable mix shift in terms of margin, or are there areas in which you could focus on cost savings? Just generally speaking, how should we be looking at this?

For most of our business today, I mean, all of our European operations-based business is in the Prestige fragrance area. So those margins are going to be relatively stable. I think that rising prices probably equates to rising costs. So I don't see that causing a significant fluctuation in margins. For the US operations, as we move more towards a licensed type of a portfolio, I think you could continue to see a little bit of margin expansion for the US operations.

Got it. And lastly, just switching gears a bit, if you could talk a little bit about your advertising and promotional spend, how do you measure the [effect of] business of your spending and are there particular brands that respond better to different types of advertising, and how do you make those decisions?

Well we follow this very carefully. This year, in order to achieve level of sales for Jimmy Choo we have spent a higher percentage of sales for Jimmy Choo. We spend this money in the countries where the brand is strong, which is US and UK. We review our spending on a monthly basis, brand by brand, market by market. So we are very, very -- we can be very reactive. If we see that basically, if we see that the product is better accepted than anticipated, we will spend more money. That's how it works.

Great. That's very helpful. Thank you for taking our questions.

Thank you.

Thank you. Our next question comes from the line of Frank Camma from Sidoti. Please go ahead with your question.

Good morning.

Good morning.

Good morning, Frank.

Hi. I was just wondering if you could talk a little bit about the lessons you've learned from Karl Lagerfeld. I think, not to put words in your mouth, maybe initially sales were good, but like the sell-through wasn't as great as you expected. Did you learn anything there that might be helpful in these, on major new brands that you have for next year, Coach, that might be relevant to Coach, Abercrombie, and Hollister?

I can say that reception for Karl Lagerfeld, we expected better reception than that. But relates -- we learned from our lessons, and I think that we'll continue with a limited amount of sales with Karl Lagerfeld, we will come up with more flankers. We will decrease the retail price of Karl in order to be more accessible.

I think that our expectations were too high on Karl. At the end of the day, that's why we have such a diverse portfolio and sometimes we are more conservative on certain brands and too optimistic on others. But at the end, you see the result and we are able to increase the sales and our means year after year.

Good. Another question just on the gross margin, obviously you pointed out about the exchange rate. Understand how that works, but could you talk, was there any meaningful difference in the proportion of gift sets that might have impacted perhaps, typically that drags down your growth rate in the third quarter? Wondering did that change at all, or is that the same?

No, we have this year the same amount in percentage.

Okay.

The same amount of gift sets in the years before.

Okay.

Very good point. It is true the gift sets, which are extraordinary promotional because we give away one, or two, or three gifts with the product and you see in the department store usually bring down the margin. This has been taken into account and in certain markets like the US, third quarter is almost all made of gift sets.

Sure.

But we have not decreased the amount of gift sets this year compared to last year.

Okay. Thank you.

Thank you.

Thank you. Our next question comes from the line of Joe Altobello with Raymond James. Please go ahead with your question.

Thank you. Good morning.

Good morning, Joe.

Just want to go back to some of your trouble markets, China, Russia, Brazil. Obviously, these have been pretty weak throughout most of this year. I guess Brazil's at more of a late comer to that party. But is there any sense that things are getting better in those markets, or that your assumption that we're going to continue to see some weakness into 2016?

I would like to, I would like to differentiate each market, Russia, Brazil and China. I would like to start with China. China is a very important market for Inter Parfum, we have invested in the Country for almost 20 years, 15 years at least and the fact that we have 2 brands Lanvin and Anna Sui very good seller in China, produced the problems that we know today, in the sense that there is less, definitely less business in Hong Kong and mainland China for the first 9 months of the year.

It is true that a lot of Chinese customers are traveling and we've seen some pickup of business in Japan and Korea from Chinese customers, but when you put all these together, we have some significant decrease of business in the department stores in China. I will say that Russia is more of an issue with the exchange rate, of the Ruble. We have to make some adjustments in Russia, and I would say that we have some opportunities in Russia especially going into next year, 2016. We still have [fondan slova] is still has two brands in the top five brands sold in Russia, the two fragrance in the top five, so it's very good.

And we have some big plans next year with other brands. And Brazil, how should I say, Brazil is very complicated because of slow exchange rate, and not enough distribution, so we are very affected. But again, the, the problem of China is for Inter Parfum the largest issue.

Russ you want to compliment what I said?

I think you touched each market very, very well. So no, I think you are 100% right. The only other thing that you may want to talk about is how that affects some of the duty-free markets in those territories.

Yes, of course. Because of duty-free being such a big business in Asia, the consequence of having a weak business even though the Chinese are traveling, we've seen some collateral damages in travel retail in this part of the world. So we have to continue to spend, this is a market we continue to spend and we review carefully our plans for next year, our launches for next year in China and Hong Kong. We will maintain our level of spending in this part of the world. But again, the growth that we see in Korea and Japan, are not enough to offset China today.

Got it. Thank you. That's very helpful, thank you, and then --.

And of course, and when we release our 2016 guidance, we will take this into account, of course.

Absolutely. Okay.

And then in terms of next year's well, if you could talk about the rough magnitude of the sales impact you expect next year from Rochas on one side and the new licenses, Coach, Abercrombie, Hollister on the other side. Which do you think will have a bigger impact on sales next year?

As you mentioned before, that really that we are betting on Rochas will have the full year, not with new products, but will have a full year of business. And what we have seen so far is quite promising. We are expecting a lot, a lot from Coach. But, this will happen starting in September of next year.

The two other big launches Abercrombie and Hollister which will be a, which will be a prop engine, So Abercrombie, Hollister, Coach, and Rochas will be the catalyst for 2016. But in order to reinforce our base business, each of the brands that we have will have either flankers or new launches.

So we are looking. We are not disclosing yet our numbers. We are looking at 2016 with confidence.

But the contribution Rochas will be bigger than the other three combined next year, I would think, given the full year.

It's difficult. It's a little premature to talk about numbers exactly. We -- next week we will be issuing our guidance, so I think Jean is trying to answer your question without putting numbers to the solution. Let's wait until we issue our guidance and see what kind of detailed numbers we're going to disclose.

Okay. Thank you.

Thank you.

Thank you. Our next question comes from the line of Hamed Khorsand from BWS Financial. Please go ahead with your question.

Hi, thanks for taking the question. Quickly, could you let us know if there are any changes in the product calendar for 2016?

In the product calendar?

Are there any changes? Jean went through on his remarks most of most of what, no go ahead.

Yes, again as I said before, to recap, Dunnhill, Montblanc, Lanvin, Jimmy Choo will have flankers or new fragrances. The catalyst of the growth will come from the new license and we have four licensed businesses: Coach, Hollister being second, and Abercrombie third and Rochas started, we have three or four months of sales. Next year will be a full year of Rochas. So these are the four new addition to the pot for you and it's where we expect the large bulk of it of increased sales.

Okay. Thanks for that.

I would not, I would not give more details of numbers by brand. I don't think it's the time to do it is now.

Okay. Thanks for that. And what reaction are you seeing from retailers heading into the holiday season with regards to inventory purchases?

That is a very good question. We -- what we have seen, and I'm talking from an international point of view, is quite a light inventory in department stores. We have shipped our Christmas gift sets very early. I think we shipped in August, and they have been in stores since October, so we anticipate a very good sales of the gift set. And inventory either at the store level or even the warehouses of our distributors is quite good.

Does that mean--?

Which is a good sign. It's a good sign. It means that sales are good, we replenish quickly for 2016.

Thank you very much.

Did I make myself clear?

Yes, thank you.

Okay, thank you for the question. Is there any other questions?

Yes, sir. Our next question comes from the line of Linda Bolton Weiser from B. Riley. Please go ahead with your question.

Hello. How are you?

Hi, Linda. Great, thank you.

So I just wanted to ask about, I know you haven't given all the guidance for next year, but a lot of the things you mentioned are for the second half.

Yes.

And I think when we look at 2015, it was also a second half-weighted year in terms of the growth. Is that what we're looking at for 2016? And in particular, the first quarter 2016? The Illicit launch globally beyond North America, that's a big driver. But what else is there, like, early in 2016 to drive sales growth?

In the first quarter of 2016, you're going to have, you're going to have the Dunnhill Absolute rollout. You're going to have rollout of a lot of existing brands. So I tend to agree with you. We will see a more positive impact in the second half similar to this year than the first half.

Okay. And then--.

Russ, do you want to add something on that?

I think you're right. As Linda mentioned, one of the biggest launches that we've had this year is the Jimmy Choo Illicit launch, which will roll out to the remaining geographical areas that it wasn't initially launched in 2015, will be launching in those other geographical locations in early 2016.

And do you expect a little bit of Abercrombie and Hollister shipments in the second quarter to start in the second quarter?

Yes, I think so. I think so. We can have some sales in the second quarter, yes. As of now, we are not behind, so we should be able to get some sales in the second quarter.

Okay, great. And then can I just ask you, I know you may not want to say too much, or whatever, but I'm wondering if it's just somehow commonly known in the industry, or it's been stated, or you've heard, or it's been published, Coty specifically said that one of its, one of PNG's 12 license stores on fragrance had not signed with Coty. And they actually quantified that it looked like it was about $100 million to $120 million of annual sales. Do you know, does the trade know the identity of that licensor who didn't sign? Is it something that you know that you could speak about?

I'm really sorry, but I really don't want to talk about this now.

Okay. Sounds good.

Impossible for us to to talk about it now.

Okay. Thanks.

Thank you.

Thank you. Our next question comes from the line of Stephanie Wissink from Piper Jaffray. Please go ahead with your question.

Thanks. Good morning, everyone. We have a couple of questions.

The first, if you could just follow up on the travel retail comment or the duty-free comments, has there been any changes in shelf-based or brand priorities within that panel that you're seeing in the worldwide, a bit regardless of the tourist traffic, but any changes in the product assortments? And then secondly, with respect to your outlook for holiday, how should we be thinking about the pricing and the promotional cadence within the fragrance category, how you expect to stack up against some of your peers? Thank you.

Regarding duty-free, it is true that when, when your launch in local market is successful, you're going to have very good response from the duty-free market they will allocate more space, it's almost -- we've seen Montblanc, for instance, and Jimmy Choo have been able to gain fuller back wall space, fuller etager, which we were not able to get. So our presence, our physical presence in the duty-free is definitely improving even for smaller brand, like Dunnhill or Agent Provocateur as you go to UK or Dubai, which are big airports, you will see that the total presence of Inter Parfum brands are increasing. And this is due to successes of the product in their local markets. The second question is more about department stores. Russ, do you want to answer this one?

I think we covered it before. The inventories at department stores are relatively light. The buy-in was relatively early. So it's on a brand-by-brand basis what we've seen as far as initial sell-through has been very, very positive. We're hoping to get some re-order activity as we move forward into, get closer and closer to the holiday season. But overall, things have been generally, generally positive in the United States department store market.

Thank you.

Thank you.

And I will add that we said it was positive in the US department stores, it's almost the same situation in Western Europe, in France, and UK, and in Germany. The markets that are more complicated are more the emerging markets. The mature markets such as US and Europe are, are way over our target.

Okay. Thank you. Ladies and gentlemen, once again.

(Operator Instructions)

One moment while we poll for more questions.

Okay. Maybe we'll take the last question, if there is one. No. Okay.

Ladies and gentlemen, there are no further questions in queue at this time. I would like to turn the floor back over to management for closing comments.

Thank you. And again, thank you all for your participation on this conference call. Whether you are on the call live or listening via our webcast. If any have additional questions, as usual, I am available by phone. Thank you, and have a great day.

Thank you, ladies and gentlemen. This does conclude our teleconference for today. You may now disconnect your lines at this time. Thank you for your participation, and have a wonderful day.