Interparfums Inc (IPAR) 2016 Q2 法說會逐字稿

Greetings, and welcome to the Inter Parfums, Inc. second-quarter 2016 conference and webcast call. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Russell Greenberg for Inter Parfums, Inc. Thank you, Mr. Greenberg. You may begin.

Thank you, operator. Good morning everyone and welcome to our 2016 second-quarter conference call. Once again, I will start with a financial overview, and then I will turn the call over to Jean Madar, our Chairman and CEO, who will discuss current business and upcoming plans. After that, we will take 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 proscribes the conditions for use of non-GAAP financial information in public disclosures. We believe that the presentation of the non-GAAP financial information included in this discussion 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 June 30, 2016, quarterly report on Form 10-Q, which has been filed with the Securities and Exchange Commission. The information is available on our website at www.interparfumsinc.com.

When we refer to our European-based operations, we're primarily talking about sales of prestige fragrance products that are connected through our 73%-owned French subsidiary, Interparfums SA. When we discuss our United States-based operations, we are primarily referring to the sales of prestige fragrance products conducted through our wholly-owned domestic subsidiaries.

Moving on to second-quarter results, net sales were $117.2 million, up 14.8% from $102 million. At comparable foreign currency exchange rates, net sales increased 14.2%. Net sales by European-based operations rose 14.8% to $88.6 million, as compared to $77.1 million. And net sales by US-based operations also increased 14.8% to $28.6 million compared to $24.9 million.

Gross margin was 63.5% of net sales compared to 59.1%. Selling, general and administrative expenses as a percentage of net sales was 53.7% compared to 51.1%. Operating income increased 39% to $11.5 million from $8.2 million, and operating margin rose to 9.8% as compared to 8.1%. Net income attributable to Inter Parfums, Inc. increased 34% to $5.8 million or $0.19 per diluted share as compared to $4.4 million or $0.14 per diluted share in last year's second quarter.

Thus, for the first half of 2016, net sales totaled $228.7 million, which is an 8.2% increase in dollars, and an 8.4% increase at comparable foreign currency exchange rates. Net income attributable to Inter Parfums, Inc. was $13.2 million or $0.42 per diluted share.

You will recall that our first-quarter results included the effect of a pending settlement of a tax assessment with the French tax authorities in the amount of $1.9 million. Excluding the effect of the pending settlement, net income attributable to Inter Parfums, Inc. for the first half of 2016 would have been $14.6 million or $0.47 per diluted share. That compares to the net income attributable to Inter Parfums of $14.4 million or $0.46 per diluted share in last year's first half.

We covered key sales drivers in our release as well as in our 10-Q filings, so I will try to focus this discussion on profitability factors. As I just mentioned, our consolidated gross margin for the second quarter was 63.8% of net sales compared to 59.1%. For European operations, the gross profit margin was 67% as compared to 63% in last year's second quarter.

Distribution channels played a significant role in that increase, as much of our growth was in product that flowed through Company-owned or controlled distribution organizations rather than through third-party distributors. In addition to increased sales of Montblanc and Jimmy Choo products that are sold through our United States distribution subsidiary, the Rochas brand, which also was a major contributor, has its sales are concentrated in France and Spain, both of which are countries where we distribute direct to retailers.

For US operations, the second-quarter gross profit margin was 53% versus 47% in last year's second quarter, with the increase due to a greater concentration of sales of our higher margin prestige products, including Abercrombie & Fitch, Hollister, Oscar de la Renta, and Dunhill.

For both European and US operations, that increase in selling, general, and administrative expense both in dollars and as a percentage of sales was primarily due to higher promotional and advertising expenses. Promotion and advertising included in selling, general, and administrative expenses aggregated $24.9 million or 21% of net sales in the current second quarter as compared to 17.5% -- $17.5 million or 17% of net sales for the corresponding period of 2015.

The increase in 2016 is primarily the result of higher advertising and promotional expenditures incurred in both our European operations and US operations in support of new product launches for Montblanc, Abercrombie & Fitch, and Hollister. This trend of higher advertising and promotional expenditures on new product launches is expected to continue throughout the remainder of 2016, as we are preparing for our launch of Coach fragrances and continue our geographic rollout for Abercrombie & Fitch and Hollister.

Despite the higher selling, general, and administrative expenses in the second quarter, we achieved a 39% increase in operating income, and a 170 basis point improvement in operating margin compared to last year's second quarter as a result of the strong increase in gross profit.

In the current second quarter, our effective income tax rate was 36% as compared to 34%. However, we expect our effective rate, excluding the previously reported pending settlement with the French tax authorities, to be approximately 35% for the year as a whole.

We have again affirmed our guidance, and assuming that the dollar remains at current levels, 2016 net sales should be in the range of $500 million to $510 million. Including the non-recurring tax settlement, net income attributable to Inter Parfums, Inc. should be in the range of $1.01 to $1.06 per diluted share. The tax settlement reduces net income by about $0.04 per diluted share.

Moving onto our balance sheet, we closed the quarter with working capital of $338 million, including approximately $232 million in cash, cash equivalents, and short-term investments. Our long-term debt, comprised entirely of a five-year term loan, aggregated $90 million at mid-year.

One item I would just like to mention before I turn the call over to Jean. With respect to Brexit, we are monitoring currency trends in the UK, and are evaluating our current pricing models. As of today, we do not expect any significant pricing changes. However, if the devaluation of the British pound continues, it may affect future gross margins from sales in that territory. However, we do not expect any material losses on accounts receivable to be collected in British pounds, as we routinely hedge those amounts.

Jean, please continue.

Thank you, Russ, and good morning, everyone. I know we have said it before, but I would like to [re-insist] that our two largest markets were also, for this quarter, our two fastest-growing, as first-half sales in Western Europe were up 44%; and North America increased 10% over the same period last year.

Despite negative market conditions in China, our overall sales in Asia, our third-largest market, were slightly ahead of the first half of last year, with Korea and Japan making up some of the shortfall from China. However, the negative market conditions in Eastern Europe and in the Middle East and South Africa that prevailed in the first quarter have continued in the second.

For 2016 as a whole, we expect most of our growth within our European operations to come from the inclusion of Rochas for a full year, and the launch of our first women's scent for Coach. Come the fall, the new Coach signature scent will enter 3,000 US doors, including Macy's and Sephora and Nordstrom, Dillards. The scent has been adapted for the Asian market. And we launch also in Singapore, Taiwan, and Korea in the fall, and a rollout to Japan and Hong Kong early next year. By the end of 2017, we are looking to be in 20,000 doors worldwide for the brand Coach.

So we have, as I said before, high expectations for Coach in the US and in Asia. The Coach brand, for your information, is the second-largest imported brand in Japan after Louis Vuitton. The Coach ad campaign features photography by Steven Meisel, who also shoots the Coach fashion campaign. The ads are inspired by the spirit of New York, and will feature 19-year-old actress Chloe Grace Moretz. The marketing effort will be focused on television spots, Internet and social media, as well as select print advertising.

Regarding Abercrombie and Hollister fragrance, these are big new additions to our US operations. Let me remind you that in the international markets, these are viewed as American fashion brands. So they are being sold in perfumeries and beauty boutiques and departments and specialty stores, and travel retail duty-free stores.

Abercrombie & Fitch First Instinct targets -- First Instinct is a [number one] fragrance -- targets the 18 to 25-year-old man. The rollout started in May. And ultimately, we expect to be in 7,000 doors throughout the UK, France, Germany, Brazil, Argentina, Taiwan, Philippines, and Indonesia.

The Hollister fragrance, called Wave, is targeted to teens and young adults aged 16 to 25, and it has started at the end of June. At the time, we expect them to be sold in over 10,000 doors in the UK, France, Germany, Brazil, Korea, Philippines and Indonesia.

First Instinct and Wave are doing especially well in the initial markets. We got the first result in UK, France, and Germany, and we are quite encouraging. Following some exclusivity arrangements with certain retailers, broader distribution within this market is underway [of plan], as is broader geographic distribution in other countries and regions.

The new scents we have created for Abercrombie and Hollister will also be sold through their respective retail and online stores. For first half, First Instinct will be [delivered] in the New York, Paris, London, and Milan Abercrombie stores soon. And Wave is launching in six Hollister stores internationally later this month. I might also add that we have also been successful extending the international distribution of the brands' legacy scents beyond our [men's sector].

There have been a few additions to our 2017 line since our last conference call. For example, we have several flankers debuting with the Dunhill brand, including one of the very successful Icon family. Also in the work is a flanker duo for Hollister Wave, a new scent for a woman under the [old style Hollister] brand is under development as well. And as I mentioned on the last call, our first new product for Rochas, the women's fragrance, was introduced in the winter, as with our new Lanvin and Abercrombie women scents.

We also have a new collection in the works for Boucheron debuting in the winter. And in the spring we will have a new Jimmy Choo scent for women. And in the fall, a very important Montblanc Legend family will welcome another member. These plans, of course, are subject to change.

We have what it takes to build on our success: a diverse portfolio of brands, a distribution network encompassing 100 countries; an industry-wide reputation for growing fragrance franchises, with enhanced each brand and enriched brand owners; and a very strong balance sheet and product balance throughout our organization.

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

(Operator Instructions). Joe Altobello, Raymond James.

I just wanted to start off on Abercrombie and Hollister, and the launches in the quarter. You mentioned in the past that this was a quote/unquote major contributor in the quarter. Have you broken out what the pipeline scale or the impact of the launch was on the top line?

No, we have not. As in the past, with a lot of our specialty retailers that are also publicly traded companies, they don't want us to disclose individual brand sales. For the most part, we tend to agree with them; and, therefore, we do not break of the individual sales for Abercrombie or Hollister, or any of our other specialty brands.

Okay. In terms of Fierce, any change in distribution to that brand in Abercrombie?

No. Today, Fierce, as you know, is distributed, of course, in the Abercrombie store. And we are -- we have started last year selling it at Sephora in Europe, and some duty-free in the US and in Asia. The results are quite good, actually very good, so we are following this carefully.

For the new fragrance, First Instinct, it's a little early. But the first indication of sales for the month -- for the last two weeks of June -- actually the last week of June and the month of July were quite good. We were in the top 10 for Hollister in UK; same for Abercrombie. So we are beating -- we are definitely beating the number for the Abercrombie and Hollister; our internal numbers, I mean.

Okay, that's great, Jean. And just one last one on advertising. If you look at the sales number year-over-year, it was up $15 million. Advertising was up more than $7 million. So how do you guys think about the ROI that you're getting on advertising? Obviously this is behind launches, so it's a little bit apples-and-oranges, to some degree. But do you feel like you're still getting a very good ROI on an incremental A&P spend?

Absolutely. I think that in this environment that we are in, a significant uptick on investing and promotion advertising is absolutely required, especially when you're trying to launch a new product. This year is a year for Inter Parfums that most of our growth does consist of new products, between Coach, even Rochas and Abercrombie and Hollister.

That's why it's -- even in our prepared remarks, I expect that the higher end of promotion advertising spending is where we are going to be for the year. Last year, we spent almost 18% of sales in the SG&A line on advertising. So far this year, we are at around 21%.

I think that that 21% is probably a much closer number to where we are going to end up for the full year, especially considering that we have Coach launching in the second half of the year, and we plan to continue rolling out Abercrombie and Hollister for our US operations. So, clearly, we are going to be almost 3 points higher than where we ended last year on the A&P line.

Got it, okay. Thank you, Russ. Thank you, guys. Appreciate it.

Frank Camma, Sidoti and Company.

A question on Coach specifically: since Japan is such an obviously big market for this, why is that later in the rollout schedule?

We are launching firstly Eau de Parfum, which is the fragrance that is more for the USA. It's a white flower, which we think is the right smell for this market.

For Asia, we will be launching Eau de Toilette. It's a different fragrance, and we will test it in Hong Kong and Korea and Singapore. But China and Japan, which is like you said, their biggest market, will happen more in 2017. We think that we'll have more visibility for this important market in 2017.

Got you. Okay, that makes sense. Let me ask you just about general comments, if you can, on the luxury market; in particular, Coach and some others have sounded a little bit down on guidance here. And I was just wondering if there is -- necessarily is that a spillover into fragrance, or if you would like to comment on that at all.

I don't necessarily think -- I read the reports on Coach, which just reported just not even that long ago. And brands such as that, some of the things that they are trying to do is to improve the image of their brand, and cut down on some of the distribution that may not be favorable, if you will, or most favorable for the brand. But the numbers were pretty strong overall, and I think that that is going to bode well for the fragrance launch.

Hopefully we are going to kind of feed on each other. As Coach does better in their fashion brands, I think it's going to help us. And I think that the fragrance, the amount of advertising spend that we are going to put behind the Coach brand, is also going to be favorable for the fashion brand.

That's fair. And my last question is a question to you, Ross, on the -- is this quarter typically the quarter that you -- when you pay the dividend in France, that it affects your income tax expense? Or do I have the wrong?

Yes, no, no, it does a little bit. We have gone more -- if you remember some of the reporting last year -- we went a little bit more to an effective annual rate during the quarterly period. So you won't have as much of an impact as a result of a one-time kind of a thing, like the dividend.

But I do expect -- and, again, as I said in our remarks -- excluding the pending settlement, I think 35% is the right number to use.

Sure. Okay, fair enough. Thank you.

Jason Gere, KeyBanc Capital Markets.

I guess a couple of questions. I guess the first one, just thinking about the second half in terms of the sales, I guess I'm just trying to figure out, when we think about the second half versus maybe the second quarter, the incremental sales versus replenishment that will come through; so in terms of launches out there, US versus Europe.

Because if we look at the trends, obviously it looks like you might see a little bit of a slowdown in third quarter for some replenishment. And fourth-quarter holiday, I think, might be better. So I was just wondering if you can give a little bit of context -- how should we think -- if there is something I am missing here, in terms of how we think about the cadence of the back half of the year from a sales perspective.

I am going to try, Jean, on this one (multiple speakers)

(multiple speakers) Yes, go ahead.

You could imply what we are projecting as far as growth just by using the overall guidance trend, the $500 million to $510 million. So based upon where we are, the third quarter is always our biggest quarter of the year, not only because of launches, but also there's a certain amount of seasonality within the business. Our guidance is kind of implying somewhere around an 8% or 9% continued sales growth between now and the end of the year. I think it's going to be very consistent with what we had in the past, as far as the third quarter and the fourth quarter.

So just comparing those, I think it's going to be very, very similar from a standpoint of growth over the prior year. They should both be somewhere in that 8% or 9%, compared to the prior year.

Okay. And is there anything from a retail inventory level, where anything to kind of point out where you are a little bit concerned. Or even with -- as you are rolling out more, just some of the incremental shelf space that you may have received for some of the products. So just wondering, just trying to think about how the retail inventory landscape looks right now, and kind of adjusting for it. Obviously Europe is -- you are doing exceptionally well there. But I am just trying to think about that from a POS versus kind of shipment perspective.

Our inventory level, at store level, is in very good shape. Maybe it's a little bit low, but we want to keep it like that. We can replenish quite quickly. The goal is [the ability] to -- for brands like -- important brand such as Montblanc and Jimmy Choo, Coach and Abercrombie, to increase the shelf space. But immediately after, with the success of Montblanc Legend Spirit, we saw that the stores has allocated more space to Montblanc.

For Illicit for Jimmy Choo, the success of Illicit was able to get us more space. But [I would think quite automatic] when retailers see that they can do -- they can sell more, it's easier of course to convince them to give them sales.

What is a little bit more difficult is for a new brand such as Coach. Coach is not doing [the second], because they had a past experience with -- under another licensee. But it's a whole new line, a whole new campaign, a whole new positioning. And I will say that in the US and in Japan, which are the largest market for Coach, we didn't find any programs to get the space for women's fragrance. For Abercrombie, it's exactly the same thing also. That's all I can tell you today in terms of space, inventory and [sales].

Okay, no, that's good. And the last question, it was obviously very nice to see a quarter were gross margin was driven not by kind of the FX play. And with currency and some of your comments about the pound, we will obviously have to watch. But as we think about going forward, you start to lap some of the tougher gross margin periods.

How much -- I guess if the sales grow in this 8% to 9%, as you are saying, in the back half, how much mix benefit should we see to kind of offset what I would say is tough comparisons to last year, where currency made a bigger play? I am assuming gross margins will probably be kind of flattish, won't see that big spike. But I'm just trying to contextualize this a little bit more.

I do understand the question pretty well. It's interesting, because in the first quarter, a portion of the gross margin expansion was the result of FX. And here in the second quarter, it really played no role whatsoever. I can't predict where the dollar is going to go, whether it's going to be strong or weak over the next six months.

But assuming it stays where it is today, I think that the trend that we have seen here in the second quarter will probably continue. Because the growth is coming from Rochas; it's coming from Montblanc. And these are sold more significantly through -- in territories where we have our own distribution. And I think that is going to continue to drive the margin.

Okay, so in other words, gross margin should obviously tick up, and that's what's funding obviously more of the step-up in A&P that you are projecting, which logically makes sense, but I just want to be clear on that.

That's absolutely correct. Keep in mind -- Jean, did you want to say something?

No, no, I would think that it's absolutely correct. We improve our margin and we spent most of the -- of what we said in extra savings. It's quite simple.

Yes. The key thing that I wanted to mention is in those territories where we are the distributor, we are driving the advertising spend in that local market. As opposed to in areas where we sell through a third-party distributor, it's our third-party distributor who is driving the advertising in that particular local market. And that's one of the reasons why we see a higher ad spend in support of these new product launches.

You are not able to break out the difference between third-party and your own (multiple speakers) is that something (multiple speakers)?

No.

No, no.

Okay. It was worth a shot. All right (multiple speakers).

(laughter) It was worth a try.

(Operator Instructions). Stephanie Wissink, Piper Jaffray.

Just to follow up on Joe's earlier question regarding some of the changes in ad and promo spend, could you just talk a little bit about some of the mediums? If you are shifting anything from traditional vehicles of advertising towards maybe new digital formats, and if that has been more beneficial to (technical difficulty) driving sales?

And then the second piece with respect to 2017, as you look out over the next 18 months or so, do you think about 2017 as another new launch driven-year, or more of an extended period of the 2016 launches? Thank you.

You want to answer, Ross, on the digital?

On the ad spending, clearly, in this day and age and environment, there is a shift to a lot more spending on the digital environment. So clearly there is a little bit of a shift to that side.

However, with most of the brands, the traditional advertising -- the traditional magazine, even television spots in certain territories -- continue to be where the lion's share of the spend is. But I do think that we do see a shift, and I think it's actually going to continue as we move on.

Going into 2017 -- 2017, Jean in his remarks, went through a whole litany of launches, some with existing brands. Of course we have some new products like the Rochas women's fragrance that is going to be launched in 2017; the Abercrombie women's fragrance that is going to also be launched. So there is quite a bit of a combination of existing portfolio brands and some of the newer brands.

As we get closer to November, which is when we typically issue our guidance for 2017, that is when we will have our calendar set. That is kind of while we wait until that time in order to announce guidance, because we will know exactly what and when we are going to be launching in 2017. So, we are giving a little bit of a flavor, as I said, in Jean's remarks. But it's going to be a year of a combination.

We've got some Montblanc products. We've got some Jimmy Choo -- (multiple speakers)

We will continue rollouts of existing products that have been launched in 2016, and we see some new products. But the fact also that we have decided to launch Coach in Japan and China in 2017 is also important, since we are able -- not to control the growth, but to capitalize on other markets before we launch this very important market of Japan and China for Coach.

Also in 2017, we will come out with new flankers for Abercrombie and Hollister. So it will be busy -- 2017 will be a busy year.

Agreed.

Russ, just one final as a follow-up. I know the last few years, the fragrance marketplace in general has been going through de-rationalization and price rationalization. Are you feeling like the bulk of that is behind you now? And the channel and the trade is healthier in terms of pricing architecture, as well as brand opportunities, given the competitive dynamics?

I didn't hear very well, so --

If I -- correct me if I am wrong, Stephanie, the question was more of the pricing structure and changes that the prestige fragrance market has seen over the last several years. I don't -- I think more of the pressure was more on the mass-market side, and shifts from mass-market fragrances. I don't really see a significant shift in pricing in the prestige fragrance market around the world.

In a particular territory, you might have some issues. Certainly, that's why we are watching the pricing models in the United Kingdom because of the Brexit situation. But I don't think that there has been any real significant pricing changes in most of the markets with which we do business.

Jean, do you?

Yes, I don't -- I agree with you.

Thank you both.

Hamed Khorsand, BWS Financial.

Just a follow-up on the last series of questions here. And given where you were in Q2 as far as the sales growth, and what you are seeing for the rest of the year, do you think this is really brand-driven? Or do you think this is customers gravitating towards the prestige line? Or is it what you are doing with promos? What is driving that growth?

I think it's (multiple speakers)

Yes, go ahead. (multiple speakers)

I think it's a combination of both. I think that Inter Parfums has been very strategic in the brands that we bring into our portfolio. We turned down quite a bit of brands that we don't think is right for our business. Coming into this year, we knew that our sales were going to be driven by new product launches with the Rochas, with the Abercrombie and the Hollister.

Clearly Montblanc has been a stellar performer, certainly achieving levels that are certainly a little bit higher than what we originally budgeted for with a flanker brand. This is the Legend family that is coming up with additional flanker products that is just driving the sales; and, therefore, we are increasing our market share.

So I think it's really a combination of the strength of the existing brands that we have, especially the larger brands within our portfolio, with Jimmy Choo and the Montblanc. And then being very selective on choosing good brands that fit our model that we can launch, and hopefully create whole new business lines with.

Okay, and then just a follow-up on that is, do you have any kind of backup plan if -- as consumer demand just shifts away from Montblanc and other brands, and maybe it's not even in your portfolio? What are you -- what's the contingency plan for that?

We are --

We have long-term licenses with Montblanc and Jimmy Choo. And the good news is that when you have a brand that is working, that people continue to buy -- when the bottle is empty, they tend to buy it again. The difficult part is to have a success. But we have some franchise into Montblanc that are very successful. All the Legend products are very successful. We keep launching the products around that and they perform very well in the market. Stephanie (inaudible) and Russ (inaudible) Montblanc will be $100 million this year and change.

Absolutely.

There is no risk that Montblanc will go from $100 million to zero. The risk is from $100 million, where do we go? How are we going to bring it to the [$115 million]? So we need to create more products. We need more space. We need more promotion. This is the kind of environment we are.

And the last thing I am going to just add to that is the environment with respect to new acquisitions, new licenses, and new opportunities. This is one of the reasons that we keep the cash on hand so that we can be opportunistic, in the event that any of our brands hit a growth shortfall, if you will.

Hopefully over the next year, two years, three years, we will be able to bring additional brands into our portfolio, and grow new franchises that could also become $40 million, $50 million, $100 million type brands, similar to what we've done with Montblanc and Jimmy Choo and the like.

Okay. I appreciate it. Thank you.

That does conclude our Q&A session, so I will turn it back to management for closing remarks.

Thank you, operator. One last point before we close: I will be presenting at two conferences here in New York City. On September 13, I will be at the B. Riley Financial Consumer Investor Conference. And I will also be at the KeyBanc Capital Markets Consumer Conference, which runs from December 7 through December 8. I hope to see some of you at these events.

Again, thank you for your participation on this conference call, whether live or listening via webcast. And as usual, if any additional questions, I am available to take your calls. Thank you and have a great day.

Thank you, everybody.

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