Inter Parfums, Inc. (IPAR) Q1 2012 Earnings Report, Transcript and Summary

Greetings and welcome to the Inter Parfums Inc. First Quarter 2012 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Russ Greenberg, Executive Vice President and Chief Financial Officer for Inter Parfums. Thank you, you may begin.

Good morning. Welcome to our 2012 first quarter conference call. Following the financial review, I will turn the call over to Jean Madar, our Chairman and CEO, who will share some business highlights, and then 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 not -- are not limited to the risks and uncertainties discussed under the headings Forward-looking Statements and Risk Factors in Inter Parfums' 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 74% owned French subsidiary, Inter Parfums SA. This business includes distribution companies owned or controlled by our French subsidiary, such as InterParfums Luxury Brands, which took over U.S. distribution of our European-based Prestige Fragrances in 2011. It also includes our distribution subsidiaries in Germany, Italy, the United Kingdom and Spain. When we discuss our United States operations, we are generally referring to sales of specialty retail and mass-market products. These products are generally sold at namesake stores domestically and for some brands, in department and specialty stores in the United States and internationally, under license agreements with the brand owners. One other point worth mentioning is that InterParfums Luxury Brands had completed a full year as the distributor of our Prestige products in the United States on January 1 of this year. Thus, quarterly comparisons of gross margin and SG&A will be more apples-to-apples than they were last year. And sales increases from European-based operations in 2012 reflect higher sales volume as opposed to the difference between ex-factory and wholesale sales in the United States. The 3 month ended March 31, 2012, set a first quarter record for Inter Parfums. Net sales increased 24% to $165.4 million from $133.4 million. At comparable foreign currency exchange rates, net sales rose 26%. European-based operations generated sales of $145.2 million, up 19% from $121.6 million. And sales by U.S.-based operations were $20.2 million, up 71% from $11.8 million. Gross margin was 64.5% compared to 64.9%. SG&A expense, as a percentage of sales, was 45.3% compared to 45.8% from the prior year's quarter. Operating margins were 19.2% of net sales for both periods. Net income attributable to Inter Parfums Inc. increased 21.5% to $15.5 million as compared to $12.8 million. And basic and diluted earnings per share were $0.51, up 24% compared to $0.41. We've covered the subject of sales drivers in April when we announced first quarter sales and touched upon it again in yesterday's news release, so let's move on from there. As mentioned earlier, gross margin was just about the same for both Q1 2012 and Q1 2011. Now that it has been over a year since taking over Prestige product distribution in the United States by InterParfums Luxury Brands, gross margins from one period to the next are more comparable. For the 2012 period, gains in margin from currency fluctuation were equally offset by changes from product mix. SG&A expense, as a percentage of net sales, was also just about the same for Q1 2012 and Q1 2011. Promotion and advertising included in SG&A expenses increased to $26.7 million, or 16.2% of net sales, from $18.3 million or 13.7% of net sales in the same period of 2011. Although the level of spending is not near the [Audio Gap] compared to 33% in last year's first quarter. We have a very strong balance sheet and excellent liquidity. At the close of the first quarter, cash and cash equivalent aggregated $27.4 million and working capital aggregated $227 million resulting in a working capital ratio of 2.4:1. We also had no long-term debt. I recently received a number of questions regarding the Betsey Johnson Chapter 11 bankruptcy, so I would like to address that subject. The bankruptcy filing was actually made by the company that owns the Betsey Johnson stores, and should have minimal impact on us. Our license is with Steve Madden, which now owns the Betsey Johnson trademarks. The closing of the 50-or-so of Betsy Johnson stores is not expected to have a material effect on our Betsey Johnson Fragrance business as we do most of our sales with third-party retailers such as Sephora. We do not anticipate any loss on inventories or accounts receivable. Finally, there is not much more we can say about our current guidance that wasn't said in yesterday's press release. We recognize that our first quarter performance was well above analyst expectations. However, they were in line with our internal expectations. We intend to provide a guidance update when we announce the resolution to the questions regarding our Burberry license. Jean, please continue.

Thank you, and good morning, everyone. Thank you for your participation on today's conference call. As we have said before, growth for our European-based operation has less to do with new product launches and more to do with building upon the strength of our brand, and worldwide distribution network. During last year's first quarter, we introduced the Jimmy Choo signature fragrance. No new scents were launched in the current first quarter. As we build upon this fragrance with the Eau de Toilette brand expansion and between the Parfum and Eau de Toilette, Jimmy Choo brand sales had increased 68% in the first quarter of 2012. Moving on, sales increased also 77% in the first quarter of 2012, and most of that increase has to do with one of our best ever new product launches for men called Legend. Burberry brand sales were up 12% thanks to the entire Burberry fragrance family, but especially it's newest member, Burberry Body. Montblanc sales continue to grow, old Montblanc [ph] was fine, when one of the brand's older scents [indiscernible] did much of the heavy lifting. Introduced in 2002, so 10 years ago, [indiscernible] has been in the market for 10 years, and according to the Fragrance Foundation website, some 350 new fragrance were launched in 2011 and history repeats itself, most will be facilities [ph] in 10 years time. Even among the survivors, few will be able to boost sales growth after the decade. Our news release yesterday project our planned Prestige launches for 2012, which we will agree [indiscernible]. However, in 2013, we probably have the most ambitious new product pipeline in our history with our proposed fragrance launches for Burberry, Jimmy Choo, Roxy and Russell, Nine West, Lanvin, Mont Blanc, Repetto, Boucheron and Paul Smith. Moving on to our U.S. operation, as we announced, we have quite a few new products debuting this year which includes a new product called Wishes & Dreams for Bebe, Miss Madison for Brooks Brothers, Wildbloom Blue for Banana Republic and 2 flankers for Betsey Johnson and a new fragrance for Anna Sui. In our press releases and our conference calls, we've talked about international distribution of U.S. specialty brands and how important cross-border sales have become. That has a great deal to do to brand perception which is not the same in different country. Would you be surprised to learn that in Europe, Gap fragrance or products are sold at 500 Sephora stores alongside luxury brands such as Chanel and Yemen [ph]. Similarly, Banana Republic fragrance are sold at Russia's largest retailer with 600 stores. When Russians see Banana Republic, they put emphasis on the luxury in the brands affordable luxury product. We have history of their designers, brand owners and specialty retailer and while we have handful we can -- then can be more assurance that any agreements will be signed this year. We are looking for under the reluctant, under sale fragrance brand, like Lane Bryant as well as fragrance offerings like Repetto. As a fragrance partner, we do fragrance for them, what they cannot do for themselves. Just before -- I'm sorry, many trade extraordinary value, we'll know we can extend the reach of their brand to new customer. But before moving to the journey I want to invite each and everyone [indiscernible] our decisions, we failed to regroup regarding the potential establishment of a new operating structure for the Burberry fragrance and [indiscernible] are ongoing. As we talked to the March, Burberry has exercised its right to evaluate the purchase price for the next buyer of the term license, if Burberry were to buyback the license, then I would read the price will be far greater, unfortunately, $250 million, which is 70% of 2010 net quarter sales of Burberry products. All evaluation of the fragrance's prior term as determined by the investment banker who has until June 30 of this year to provide evaluation. Burberry has until July 31 to determine whether it wishes to buy out the unexpired portion of the license or continue the existing contract, which runs through December 31, 2017. So there remains 3 possible outcomes: one, the new joint operating structure with Burberry; two, buyouts of remaining term of the license; or three, business as usual through at least 2017. Beyond this reputation of the facts, we are limited in making any comments or providing any updates. One last one. We will be presenting at the 3 upcoming investor conferences, the Citi Global Consumer Concerns on May 23, the Piper Jaffray consumer conference on June 5, and the Stephen's Annual Spring Investor Conference on June 6. Also 3 are in New York. Please, operator, we can open this call for questions.

[Operator Instructions] Our first question comes from Neely Tamminga with Piper Jaffray.

Jean, just have a question, very high-level question for you as it relates to fragrance. It just sounds like you, guys, are executing excellently. You have a great pipeline of opportunity in 2013. From your perspective on the demand side, from the consumer, maybe thinking either by geography or price points, could you give us a sense as to where you think the current demand is for fragrance? And what that might look like over the next couple, call it 6 to 18 months, based on your own historical expertise in the space? That will be helpful.

The demand geographically is still very strong. If you want let's talk about geography. U.S. has been very strong for us this year, in the first quarter I think has delivered good results. And we continue to think that the U.S. Prestige market is very big, and still has a lot of potential growth. The U.S. is definitely a priority for us. Where we see also a great opportunity is Asia where after we have over 20% of the first quarter. And we do the projections that we have for 2013, we feel that we'll be able to maintain this kind of increase. Middle East also has been very strong in the first 3 or 4 months of the year, I think, we are almost 40% in this region. So geographically, this is where the growth is going to be, so the countries that I didn't mention, Europe, where some of it has been quiet. Even though it hadn't been down, it has been up, I would like to say flat to up. We achieved quite a performance when we were going in Western Europe. We -- from a price point of view, we think that the higher end market, Prestige market, the department store market, either where the growth is possibly going to be. So we will take all these opportunities in 2013. With all the launches that we have, I think 2013 will be the largest ever year of the launches for Inter Parfums.

The only thing that I would add to that is, of course, the -- when we mentioned the Europe -- the Western European market, I believe that the -- during our year-end conference call, we went through a -- into a whole exposé on some of the problem countries. Spain and Greece sales continue to be down, although both of those countries represent, each individual, less than 1% of our overall sales. Most of the other major countries, France, the U.K., we're basically flat to up slightly during the first 3 months of 2012.

Russell, very helpful, Jean, as well. And then, I may have missed the exact kind of roadmap in terms of timeline on the Burberry fragrance, when and how would you, guys, plan on communicating, kind of, the resolution of the conversations?

Well we would -- as soon as anything definitive is known, we would, of course, make an announcement. The deadlines themselves, the only real deadline that exists as of right now, is July 31. Although the investment bank in each, provided the performance Burberyy with their evaluation of the valuation of the unexpired term by June 5 [ph]. Burberry has until July 31, 2012, to notify us of their intent. We, of course, are much more hopeful that something else might be announced before then. I can also tell you that an investment banker there has been hired to do the valuation, if you remember the buyout prices, the greater of the $250 million that Jean mentioned, which is 70% of 2010 wholesale sales for a valuation that is done by an independent investment banker. So that's basically the only deadlines that exist currently.

Our next question comes from Joe Altobello with Oppenheimer.

First on the guidance, just want to be clear here, obviously the decision to not resize, which I completely understand, you did say the quarter was in line with what you expected internally, and also said you'd be -- the Burberry uncertainties. So just to be clear, even without the Burberry uncertainty, you wouldn't have raised guidance given the very strong start to the year?

The essence to that is, no, we would not have raised guidance based on the current plans for 2012. The Burberry issues are kind of -- solidifies the fact that we could be dealing with different models as depending upon what the ending solution is. The one thing that I will bring to light is that the first quarter was a relatively easier comparison on a quarter-by-quarter basis because the -- because of the huge growth that we achieved in the third and fourth quarter of 2011 as a result of the launch of Burberry Body. Burberry Body did not exist in the first quarter of 2011, so from a projection or internal expectation standpoint, we are above or at least, we are above our expectations, but not significantly above, we are not significantly enough to cause us to change our guidance at this time.

Okay, got it. And then in terms of the increased spending, it was up year-over-year, but given the timing of the launches from last year, that's to be expected given you're obviously saying to support this quarter's launches. This year, you don't have nearly as many, obviously, big launches that you did last year. So how should we think about AP spending, because in the past, I think, you said you expect to be relatively equal last year relative to sales, yet, given the lack of launches this year, it seems a little bit, I don't know, difficult to believe.

Keep in mind that, yes, last year was a little bit of an exceptional year because of all of the different launches that we have. We have a fairly significant program for 2012 not only -- for all of our brands. At this point in time, even in the first quarter of last year, Jimmy Choo was still an exclusive in certain stores in certain countries. Now we are distributing that on a basically worldwide basis. Similar situation with Montblanc, and of course, Burberry is, of course, in the same boat. So overall, the expectations are still, at this point in time, similar to the spendings that we had last year.

I think in the first quarter, if I may add, in the first quarter we spent something like 16% of our sales in promotion and advertising. And a lot of the spending was spent on the Jimmy Choo and Mont Blanc. Of course, we continue to spend on the Burberry, but not at the same rate as we did during the launch that in the fourth quarter. But I would say that the spending around 15% or 16% for the year, or maybe a little more, should be expected going forward.

Okay. Just to clarify, the AP spending you said was going to be 16% or slightly more of sales this year versus 21% last year?

Last year was 21%. What I indicated before is that the spending is going to be similar to that of last year. Is it going to be exactly 21%? Is it going to be 20% or 19%? The answer is yes. We're still putting together the final plans with respect to what's going to happen at the end as we move towards the holiday season.

Understood. Just one last one, the tax rate you're expecting was for this year?

The tax rate, 36% for the first quarter, again, this is all as a result of the enactment of the tax increase that was enacted in France at the early year, it was actually enacted early in 2012 so it's retroactive in 2011. That brought the French tax rate to around 36%. I think on the blend, for the full year 2012, we should be somewhere around 35%, maybe 35.5%.

Our next question comes from Linda Bolton-Weiser with Caris.

Can you -- maybe you could just give us a little bit of flavor on how you're operating with regard to the Burberry franchise right now? Like maybe even -- I'd be interested to know on the cosmetic side, are you continuing to roll it out in additional doors and like what's the current plan? Just assuming nothing else is going on, like can you tell us how many new doors opened in the first quarter? And what are you doing, or are you just holding off and just waiting until you get everything resolved? So can you give us an update on how you're currently operating? That would be helpful.

Yes. And I think it's a very good question, Linda. We are operating the Burberry the same way that we have done about the last 15 years. So Burberry, because we have this issue that we are going to try to resolve, that this might be affected. At the contrary, we are -- we have continued the rollout of Burberry Body. We are strengthening our presence in department store. We are also, were sync on these launches, that are going to happen in 2013. So this is to tell you that except 2013 and while we think we see what is going to happen. We are seeing that in Eau de Toilette, by the way, our sales -- will be up this year on Burberry. And we are in the Beauty. Beauty is a very important segment for Burberry because it gives an extraordinary presence in department stores by having the corner, the stand in -- on the ground they hold in department stores. So we will continue to invest. We are opening the [indiscernible], first we give you the latest products that we have, but we are continuing to invest and we are continuing to open doors especially in Asia. And the good thing is when we saw our fragrance sales increased at the Beauty locations, because what I thought is girls fragrance with makeup, so far not only a stronger fragrance in store, but it's also another way to increase the sale.

With respect to the number of doors, at the end of 2011 we're in just about 90 doors. Our plan was to open another 30 doors, so we should be somewhere between 110 and 120 as we move towards the holiday season of this year.

And then can I just ask, also, to the extent you can comment on -- I know in my discussions with you it's been clear that even if you are bought out, your license for Burberry, that you would want to continue on and use the proceeds to make acquisitions, et cetera. Can you give a flavor as to whether you're formulating plan B, at all, like have you stepped up your pace at looking at possible acquisitions or you're just kind of waiting to see the resolution of what's going to happen here? Like how have you, kind of, gone about your thinking on how you're approaching that?

I would say that we never stopped looking at acquisition. We have been looking at acquisition in the last year. No, we -- again, we are actively talking to Burberry, we are changing almost daily. Now we have to find the best for the company. We recognize that Burberry represents 50% or 60% of our sales. But the relationship with Burberry is good and we don't wait -- first we have to work because, as I said before, it's business as usual. So we have to maintain our market share in the stores. But at the same time, like we have done before, we are looking at potential new license and potential acquisitions. You know that we have no debt, so if something comes up we can always -- we've -- we can the release the money from our investments, we can actually -- if we look at interesting acquisition, interesting opportunity.

[Operator Instructions] Our next question comes from Eric Hollowaty with Stephens.

Russ, just a quick one on the gross margin shift in the quarter. I've noticed you guys did a greater percentage of your sales in the U.S. business versus Europe. Was that the main driver of gross margin -- the mix shift impact on gross margin that you've mentioned? Or is there anything else we should understand about maybe some longer-term shifts that has happened in the...

No. Actually, contrary to that, what I've really tried to get across in the opening remark is the fact that we are now -- have now anniversary-ed the sales of InterParfums Luxury Brands, which is that U.S. distribution subsidiary. So the margins that we're achieving in the first quarter from that subsidiary are the same, or very similar to what that subsidiary provided for us in the first quarter of last year. It was a growth that we perceived, I mean, U.S. North America was up 70% I believe, even just the U.S. alone was up 68%. That growth is really on increased volume and not on the difference between wholesale and ex-factor sale. The margins itself will be at -- they were almost identical. Because of the exchange rates, the average exchange rate in the first quarter came out about 1.31. Last year's first quarter, if my memory serve me correct, it was around 1.36 or 1.37, so one might have ordinarily expected a little bit of a gain on the margin side because of the currency exchange rates. Product mix, when we're discussing that, it's really different types of product, different brands and how they play amongst themselves throughout our P&L. Also keep in mind, U.S. operations was 70%, 71%. Our U.S. operations, we've always disclosed before, the margins on the U.S. side of the business are slightly less than that of our European operations. So there's where we're really coming in with what I mean by product mix.

And as we said that the gross margin was pretty stable, 64.5% compared to 64.9% for the year, it's very close.

Absolutely. And that's why the gain that one might have expected because of the change in currency was almost identically mitigated by the product mix change.

There are no further questions at this time. I'll turn the conference back to management for closing remarks. Thank you.

Thank you, operator. And thank you, all, for your participation on this conference call whether you are live or listening via our webcast. As usual, if anybody does have additional questions, I can always be reached by phone. Thank you, and have a great day.

This concludes today's conference. All parties may disconnect. Have a great day. Thanks.