Inter Parfums, Inc. (IPAR) Q2 2012 Earnings Report, Transcript and Summary

Greetings and welcome to the Inter Parfums Inc. Second Quarter 2012 Conference Call. [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 for Inter Parfums Inc. Thank you. Mr. Greenberg, you may now begin.

Thank you, operator. Good morning and welcome to our 2012 second 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 are not limited, to the risks and uncertainties discussed under the heading 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 73% owned French subsidiary, Inter Parfums SA. This business includes distribution companies owned or controlled by our French subsidiaries 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. Specialty retail products are typically sold at namesake stores, domestically and in department and specialty stores in the United States and internationally, under license agreements with the brand owners. One point worth repeating is that January 1 of this year was the one-year anniversary of InterParfums Luxury Brands, our wholly-owned subsidiary at Inter Parfums SA and the distributor of Prestige products in the United States. Thus, quarterly and year-to-date comparisons of gross margin and SG&A expenses are more apples-to-apples than they were in 2011. In addition, the increase in sales from European-based operations in 2012 reflect higher sales volume as opposed to an increase from the difference between x factory and wholesale sales in the United States. Moving on to our record second quarter. Net sales increased 20% to $145.6 million from $121.1 million. At comparable foreign currency exchange rates, net sales actually rose 29%. European-based operations generated sales of $125.6 million, up 18% from $106.5 million. And sales by U.S.-based operations were $20 million, up 37% from $14.6 million. Gross margin was 60.8% compared to 61.6%. SG&A expense as a percentage of sales was 52.1% compared to 52.6%. Operating margins were 8.7% of net sales as compared to 9% in the 2011 period. Net income attributable to Inter Parfums Inc. increased 20% to $6 million as compared to $5 million. And finally, basic and diluted earnings per share were $0.20, up 25% compared to $0.16. Thus, for the first half of 2012, net sales were $310.9 million or 22% ahead of $254.4 million in the first half of 2011. At comparable foreign currency exchange rates, net sales rose approximately 27%. Net income attributable to Inter Parfums Inc. increased 21% to $21.5 million from $17.8 million. And diluted earnings per share was $0.70 as compared to $0.58 in the first half of 2011. We already covered the subject of second quarter sales drivers in July when we announced second quarter sales and we referenced them in yesterday's news release. So let's move on from there. As I just mentioned, now that it has been over a year since InterParfums Luxury Brands took over Prestige product distribution in the United States, gross margins from one period to the next are more comparable. Gross margin of 60.8% was off only slightly from 61.6% in the second quarter of 2011. We had some margin gains associated with currency fluctuations, which were offset by changes in product mix. As noted, in the current second quarter, there were a larger proportion of value sets sold as compared to the same period last year. This was particularly the case in connection with Burberry and the Jimmy Choo brand sales. SG&A expenses as a percentage of net sales were 52.1%, just slightly lower than the 52.6% in last year's second quarter. Promotion and advertising included in SG&A expenses increased to $30.4 million or 21% of net sales from $22.5 million or 19% of net sales in last year's second quarter. It bears repeating that in 2011, the promotion and advertising budget was heavily weighed to the second half of the year, timed with the unprecedented advertising campaign in support of the launch of Burberry Body. While our advertising budget for all brands is running at a high level in 2012, to maintain the positive sales momentum and growth in market share, we are, and expect to remain below 2011 levels. For the current second quarter, royalty expense included in SG&A expense aggregated $12.4 million or 8.5% of net sales as compared to $10.8 million or 8.9% of net sales for the same period in 2011. We have a very strong balance sheet and excellent liquidity. At the close of the second quarter, cash and cash equivalents aggregated $23 million. Working capital aggregated $223 million, which resulted in a working capital ratio of 2.7 to 1. We also had no long-term debt. As we announced last month, our 2012 guidance anticipates net sales of approximately $632 million, with resulting net income attributable to Inter Parfums Inc. of approximately $35.9 million or $1.17 per diluted share. This guidance assumes the dollar remains at current levels. Jean, please continue.

Thank you, Russ, and good morning, everyone. Thank you for your participation on today's conference call. As we have reported, Burberry will buy out the license rights for EUR 181 million or approximately $220 million at current exchange rates, excluded of receivables, inventories and other tangible assets. We recognize that many of your questions and concerns relate to the end of our license agreements with Burberry on December 31. Quite frankly, we're still thinking a great deal about this too. We see the future still in our comfort life [ph] as an exciting one and one in which we have a great deal of confidence. One of the reasons for our confidence is the knowledge that much of what we had accomplished with Burberry can be repeated with other brands in our portfolio. From 1994 or 1995 when we launched our first Burberry fragrance to 2011, Burberry fragrance has increased at a compound annual growth rate of 27%. We've had some very interesting growth with other brands as well. For example, in the 7 year period that Lanvin fragrance is in our portfolio, brand sales have grown at a compound annual growth rate of 22% from $20 million to $80 million in 2011. In addition to steady growers, we have some potential superstar brands in our portfolio. For example, Jimmy Choo. With only one Jimmy Choo fragrance, in our first year, we were able to generate net sales of nearly $41 million and brand sales continue to grow at a fast pace in 2012. We've had some notable and compelling trends. Like Russell said before, a very sound financial position, also industry recognition as a brand leader, the worldwide distribution network, a scalable business model, a balanced portfolio of brands plus a wonderful [indiscernible]. As a result, we are confident that as we reported, 2013 net sales, of course without Burberry, can reach approximately $400 million, generating also a [indiscernible] 10% operating margin with the remaining brands in our portfolio. In the coming year, we have a huge lineup for 2013 with launches planned under Jimmy Choo, Van Cleef & Arpels, Paul Smith, Lanvin, Balmain, Repetto and Boucheron brands. Of course, in addition to organic sales, we are pitching other designers, other brand owners and specialty retailers. And while we are hopeful, we cannot assure you that they are going to be signed. As fragrance partner, we create extraordinary revenue for the brand owner with minimal risk and we expand the reach of their brands to new customers. In 2013, we will have even bigger focus starting the year with approximately $250 million in cash and expect a considerable borrowing [indiscernible] . But we are not under any pressure to [indiscernible] nor is there any issue. I want to come back to the business initiative I've mentioned several quarters ago, namely the travel amenities. I'm talking about the shampoo, the lotion that one can find in hotel or when you travel. We have a lot to learn about this business and found that there's more to it than just [indiscernible]. It involves matching the travel [indiscernible] to the brand and entity with existing supplier. I'm pleased to report that we have opened several doors, we currently supply Air France, [indiscernible]. And we'll be onboard with China Airlines for both first and business class in the fourth quarter of 2012. In addition, we are in the final stage of contract negotiation with this 5-star hotel chain with over 100 hotels worldwide that is expected to be signed at the end of this month. At this point in time, the travel amenities business barely moved the needle on our sales, but we view it as one that has significant growth potentials over time. So this ends our prepared remarks. Operator, we can open the floor for questions, please?

[Operator Instructions] Our first question comes from the line of Joe Altobello with Oppenheimer.

A couple of questions here. I mean, I guess, in terms of the Burberry exit, and looking forward to '13, you guys will have a fair amount of cash on the balance sheet. And I think in the past, you said, your first priority, clearly, is sort of fill the hole in the portfolio left by Burberry. What is the market for fragrance licenses these days? And what type of brand or brands will you be looking for?

Well, I'll start by answering -- I don't think the strategy with respect to brands that we've followed probably for the last 15 years is going to change. One of the most important aspects of our business is when you look at the classic brands that are in our Prestige Fragrance portfolio, we're going to continue on those trends and what's most important for us is when we evaluate a brand is making sure and looking to see if it has the international cachet, meaning that it could utilize the international sales force or the international distribution team that we have. It's very rare for us to sign a license with the brand that is totally concentrated in just a small area, say, even just the United States for that matter. Having a brand that can be distributed through our worldwide network is really something that we look for as one of the key priorities in connection with something that we would be looking at.

Are there other opportunities out there like that?

There are definitely opportunities out there.

If I may answer, however, why we contact with a lot of brand owners, sometimes they don't have a license, sometimes they do have a license, things could change, some also larger companies, midsize, so we focus their portfolio, so we could, going forward, look at something that we can [ph] on the other hand, and maybe it's too small for our large, very large corporation but can do -- where we can do a good job [indiscernible]. So, yes, there's definitely some opportunities.

Okay, got it. And just in terms of the Burberry brand, obviously, it's been very profitable for you guys the last couple of decades now. Is there a risk that there's sort of a reverse halo effect so to speak where if you lose the Burberry brand that it may detract from the strength of other brands that may have benefited from that relationship with Burberry?

I think that Burberry was presently a very large portion of our sales, around 60%. But I will say, I'm talking to all our distributors worldwide the quality of the products that we have in our portfolio will make the business very viable without Burberry, [indiscernible] for the other brands. Burberry was, of course, representing a large amount of -- a chunk of our sales but there were also [indiscernible] a big advantage of our [indiscernible]. Russ, you may want to comment on that?

Yes, no. I think you hit it. The main part is really within the distribution network, the other brands in our portfolio have a clear sense of themselves. And I don't believe that it's going to impact the relationship we have with the distribution network or their ability to market the fragrances into the retail network. I think there's clearly some significant strengths there. And we'll see what happens moving forward.

Okay. And Just one last one, if I could. Does the loss of Burberry or the pending loss of Burberry impact, at all, the way you're going to operate in the back half the year, whether it comes to A&P spending or the timing of launches, et cetera.

May I answer. For us, we have the fragrance until December 31. So we are going to sell the products until the last day. And we have an agreement with Burberry regarding royalty, pricing, et cetera. So there is absolutely no changes on how we're going to manage the business for the next 6 months. But of course, we need to prepare ourselves for what's after January 1. So a lot of our [indiscernible] need to prepare the launches, all the launches of the new products we have from the other brands that...

As far as we're concerned, it's business as usual.

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

Can you just explain a little bit more about -- you said that you expect the cash position of around about $250 million at the end of the calendar year. Will the conversion of the working capital related to Burberry to cash be completed at calendar year end or does some of that kind of flow over into the next year? And also is there any kind of like a transition services type situation that you envision or are you just absolutely cutting it off right at the end of the year in terms of dealing with Burberry? And then finally, related to that also, I guess, your North American distribution joint venture would continue to distribute Burberry, I would imagine, but is there a chance of losing that distribution if somebody else takes over the license like a Estée Lauder or L'Oreal, for example. And is the distribution of that organization, is Burberry like a bigger percentage of the distribution versus of your own sales, is it really dominated by Burberry or is it's actually more diversified in terms of that distribution organization?

You want to ask [indiscernible] about the cash, Russ? I know you just...

Yes, I'll start. So far, I've got about 4 different questions that were in there or at least 3. With respect to the cash, the $250 million estimate is really, I guess, either a late 2012 or early 2013 number. We basically are looking at what our expected cash position is. Yes, we will receive EUR 181 million. The working capital will take care of itself. It really depends on what happens first with inventory because there is an option for Burberry to buy the existing inventory. If they don't buy the existing inventory, then we have a selloff period. So it will take probably 3 to 4 months in order to convert all the working capital to cash. But at the same time, as we've mentioned, there's taxes to be paid on the EUR 181 million -- the money we're receiving for the license but those taxes won't have to be paid for several months or whatever the case may be. So we're kind of looking at what the position will be once all these things are wound down or at a particular point in time. With respect to cut off of the license, this is really in negotiation that's ongoing between Inter Parfums and Burberry. The way the license was written, yes, there was a cut off as of December 31. But as we answered the last question, it's business as usual. We're working on new launches for Burberry. We're going to take their lead on this, if they need some help or we need to transition the business or we need to take 3 or 4 months or whatever the case may be. We are looking to do whatever it is that Burberry needs in order to make this as smooth of a transition as possible. The third question you had with respect to the distribution subsidiary here in the United States. That's yet to be seen. It really depends on what the wishes of Burberry are. If they want to use our distribution subsidiary, certainly they're entitled to, they can. I'm sure we'd be willing to work with them to some extent. If they don't, these distributions subsidiaries will remain intact, we have a remaining portfolio of products that are -- who have products that go through these distribution subsidiaries. Our relationship with the Clarins team and the partnership we have with them is expected to be ongoing. I don't really see any changes. Jean, do you have anything that may be...

No, no. Regarding our subsidiaries, especially in the U.S. the one that we have in cooperation with Clarins, Burberry represents a [indiscernible] percentage of our sales, so if Burberry decides not to use our subsidiaries in the U.S., it will [indiscernible] entity for us [indiscernible] that we have in our portfolio. As Russ said, we -- again, the decision not to continue the negotiations came from us 2 weeks ago, so we need to, I'm sure we'll stop working on the proposed transition and, as Russ said, it could take us 3 months or 4 months or but not -- maybe up to 6 months, but not longer than that to transition [indiscernible] Burberry, like we said or to another company that Burberry decides [indiscernible].

Our next question comes from the line of Eric Hollowaty with Stephens Incorporated.

Why don't you just touch on the travel amenities business, and thank you, Jean Madar, for providing an update on that. I just wanted to quickly revisit the details. I heard Lanvin with Air France, but didn't catch the date on that, I just couldn't hear through the conference call, and then China Airlines in the fourth quarter but didn't catch the brand on that and then a five-star hotel chain with 100 doors. But anything else that we might have missed there will be great.

Well you have not missed a lot. We're happy to get the Air France [indiscernible] business. We just expanded to China Airlines, we will be shipping there very soon. So [indiscernible] segment the airline business and usually, you have to work a year or 2 in advance, because they have contracts with other brands and very interesting and a profitable business. And the other business just includes the amenities that you find in the hotel. And I think that's the start with this contract, we did a subcontract for IP [ph] , this huge hotel chain, a 5-star, it will be with Lanvin also. So we found that Lanvin resonated very well with a lot of European or Asian hotel chains, so we'll be, in the future, are pushing Lanvin brand in these amenities. So we are off to a good start. It was a little slow, it took us a little longer, but now, I think, we have a real strategy in place.

That's great. And in terms of the margins on those products, how do they compare on a gross margin basis to your core product categories?

Their cost of goods is a little bit higher than our average cost of goods, but there is almost no SG&A, because it was not exercised. And the G&A has recently being absorbed by the company. So there is no advertising, there is no promotion, there is no business structures, we just have to a [indiscernible] high level the cost of goods sold. So overall, on a net contribution, it's a quite profitable business. Russ?

Yes, no. I tend to agree. The cost of goods is closer to the cost of goods we have on specialty retail than there is on the Prestige side of the business. But as Jean said, he's 100% right. There's really no incremental selling expenses, no advertising. There's not a marketing campaign or anything along those lines. So bottom line, it is a nice profitable business.

[Operator Instructions] Our next question comes from the line of Linda Bolton-Weiser with Caris.

I just wanted to follow up again, I'm not sure if I heard all the comments that you made about, again, the areas you're looking into for potential acquisition. I mean, my feel or my understanding from you is that you really want to do what you're good at, which is Prestige, fashion brands that have global appeal. But are you willing to open your consideration to, just for example, maybe looking at some celebrity-type fragrances or even looking at something like skin care or a color cosmetic brand or even personal care? I mean, how open-minded are you or are you not? Can you give a little more color on your thinking?

Yes, I can try, I can try. We, therefore, have some experience with acquisitions. We know what we are good at and we know what we are not good at. So skin care and color cosmetics will not be in our target -- so no personal care and no color. And we said that we are good at fragrances, so we'll be looking at acquiring a sizable business in fragrances, it could be a designer or celebrity, I don't think you don't have to go to [indiscernible] but our main focus will be definitely fragrance. Again, as I said, we took Lanvin -- Lanvin had the business under license with L'Oreal, we took Anna Sui from P&G, we took from Montblanc from P&G, we took Boucheron from Gucci Group. So in the last 3, 4, 5, 6 years, we have been involved to find interesting target and successful so I'm really, really not worried about the use of our money.

Our next question comes from the line of Eric Hollowaty with Stephens Inc.

Russ, a follow-up for you. Can you remind us, was part of your CapEx budget under Burberry going to the build-out of the Burberry Beauty counters at point of sale? And if that's true, given that, that business is going away in 2013, any sense of what a reasonable CapEx run rate might look like in 2013?

Without going into too much detail on that, we used a relatively short amortization period for those counters. So I don't -- and the number of counters is still relatively minimal, so I'm not expecting any sort of a sizable write-off in connection with that but certainly, there will be some dollars that will be allocated against the money that we'll receive for the brand. All right. I can't get into too much detail, but again, with a relatively short amortization period, because you never knew, each of the contracts were individual contacts with the retail stores. Some are 1-year contracts, some are 2-year contracts, so with that in mind, you would advertise.

I don't think it goes over 2 years.

Yes. I don't think so, either. I wasn't 100% sure of that, but I didn't think so.

I see. Okay. I was less concerned about the potential for write-offs and more just trying to come up with a normalized free cash flow in [indiscernible] in 2013, basically, you're saying, you'd rather not give out the number, and the impact to CapEx...

As far as the actual spending on CapEx.

Yes, the spend.

I think, we normally have always spent -- it's actually very difficult to do that because there's a certain amount of spend that is always done for the tooling and molds[ph]. And we kind of go into some detail in the 10-Q on that. You can probably extrapolate from what's written in the 10-Q if you look back a few quarters. But specific numbers, we have never disclosed, sorry.

Mr. Greenberg, there are no potential questions at this time, I'd like to turn it back to you for any comments you may have.

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

Ladies and gentlemen, this does conclude today's conference. You may disconnect your lines at this time, and we thank you, all, for your participation. Good day.