Inter Parfums, Inc. (IPAR) Q4 2012 Earnings Report, Transcript and Summary

Greetings, and welcome to the Inter Parfums Fourth 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, Executive Vice President and Chief Financial Officer for Inter Parfums. Thank you. Mr. Greenberg, you may begin.

Thank you, operator. Good morning, and welcome to our 2012 fourth quarter and year-end 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 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, which is codifications for the use of non-GAAP financial measures, prescribes 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 presentation 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 Annual Report on Form 10-K, which has been filed with the Securities and Exchange Commission. This information is available on our website at www.interparfumsinc.com. 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 operations, we are generally referring to the sales of specialty retail and mass-market products, and more recently, Prestige labels, Anna Sui and Alfred Dunhill, as well as travel amenities. 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. Moving on to our fourth quarter as we reported yesterday. Net sales declined 6.4% to $176.9 million from $189.1 million. At comparable foreign currency exchange rates, net sales declined 7.7%. European-based operations generated sales of $152.4 million, down 10.1% from $169.6 million. Sales by U.S.-based operations were $24.5 million, up 25.9% from $19.5 million. Gross margin was 63% compared to 61.1% in 2011. And SG&A expense as a percentage of sales was 54.6% compared to 55.9% in 2011. During the fourth quarter of 2012, we recognized a pre-tax gain of $198.8 million related to the termination of our license agreement with Burberry. As a result of this gain, operating margins were over 119% of net sales. Net income attributable to Inter Parfums was $99.6 million, and diluted earnings per share was $3.24. Excluding the gain, operating margin was 7.4% of net sales compared to 4.8% in 2011. Net income attributable to Inter Parfums, Inc. was $6.6 million compared to $4.1 million, and diluted earnings per share were $0.21 compared to $0.13 in 2011. Drilling down into certain fourth quarter financial highlights. Gross margins improved versus the fourth quarter of 2011, reflecting the benefit of a stronger dollar versus the euro. The decline in SG&A expense as a percentage of sales was due in great part to a reduction in promotion and advertising, included in SG&A expenses, both in dollars and as a percentage of net sales. In the 2012 fourth quarter, those expenses declined to $44.4 million or 25.1% of net sales, from $49.8 million or 26.3% of net sales in the prior year's fourth quarter. As most of you know, in our 2011 -- in 2011, our promotion and advertising budget was heavily weighted to the second half, corresponding with the advertising campaign rolled out for the launch of Burberry Body. In 2012, net sales were a record $654.1 million or 6.3% ahead of the $615.2 million in 2011. At comparable foreign currency exchange rates, net sales rose approximately 9.4%. Net income attributable to Inter Parfums was a record $131.1 million or $4.26 per diluted share. Excluding the gain relating to the Burberry transition, net income attributable to Inter Parfums increased 18%, still a record at $38.1 million or $1.24 per diluted share, as compared to $32.3 million or $1.05 per diluted share in 2011. We discussed market drivers and geographic markets in our releases, so I'd like to move on to other factors contributing to our profitability. For the year, gross margin was 62.2% in 2012 or about the same as the prior year 2011. Since over 40% of our European-based operations net sales are denominated in dollars, while related costs are incurred in euro, a stronger U.S. dollar has a positive effect on our gross margin. The average dollar-euro exchange rate was up approximately 7% in 2012 as compared to 2011. However, certain slow-moving products, primarily Burberry Sport, which was discontinued and sold at a discount, these sales mitigated the gross margin improvement from currency fluctuation. SG&A expenses as a percentage of net sales was 49.8% in 2012, down from 51.3%. We continue to invest in our stronger selling products and brands, and promotion and advertising included in SG&A aggregated $132.7 million in 2012, up 3.8% from $127.8 million in 2011. Also, as we reported, profitability was impacted by a $1.8 million goodwill impairment charge related to our Nickel skin care business as compared to 2011's goodwill impairment charge of just over $800,000. Foreign currency losses aggregated $3.1 million as compared to a gain of $1.5 million in 2011. The strengthening euro relative to the dollar accounted for gains in 2011, while the weakening euro in 2012 accounted for the losses in 2012. At the close of the fourth quarter, cash and cash equivalents aggregated $307 million, and working capital aggregated $367 million. We had no long-term debt. And for the full year 2012, Inter Parfums generated cash flow from operations of $61 million. In April, we will be paying taxes on the $198.8 million gain related to the termination of the Burberry license agreement at a rate of approximately 36%. We also announced that our board voted to increase our cash dividend by 50%, which means an annual dividend payout of $0.48 per share payable quarterly. We remain confident that we will achieve our 2013 guidance of $480 million in net sales resulting in net income attributable to Inter Parfums, Inc. in the range of $0.90 to $0.92 per diluted share, which factors in the Burberry transition agreement, the inclusion of Alfred Dunhill from April, and assumes that the dollar will remain at current levels. Jean, please continue?

Thank you, Russ, and good morning, everyone. Thank you for your participation on today's conference call. 2012 was a great year for Inter Parfums. It bears repeating that despite having had no major launches, the momentum of new products introduced in 2011 propelled our sales and earnings to record levels. We reached an agreement with Burberry, that as Russ noted, has transformed our already strong balance sheet into a very powerful resource for investing in new products and brands. We are attracting more and more brand partners, and the reason goes beyond our big pockets. Brand owners respect our track record and reputation for establishing fragrance brands where none existed before. They also see what we have accomplished for brands that are underserved by the fragrance licensee. The latter scenario is exemplified by the addition of Alfred Dunhill and Karl Lagerfeld to our brand portfolio. In December, we entered into a 10-year worldwide license agreement to create, produce and distribute fragrances under the Alfred Dunhill brand, which begins in April of this year. As you will read in our 10K, we are paying a license entry fee of approximately $1,900,000. Dunhill is a premier British brand. We've rooted it in back to the late 19th century, inspired by traditional craftsmanship and possessing a strong reputation for luxury and elegance across a range of men's products. We see a highly compelling opportunity to building the Alfred Dunhill fragrance enterprise into a major aspiration of fragrance brands. Our rights under this agreement commence this April and we will initially market existing products, introducing a new line under this brand in 2014. The Alfred Dunhill brand is owned by Richemont, which happens to also own the Montblanc brand and also the Van Cleef & Arpels brand. And that fragrance business, I'm talking about the Montblanc, under our ownership has become an unqualified success, with brand sales rising 40% in 2012. We discussed our agreement with Karl Lagerfeld on our last conference call. And since that time, we have become increasingly excited about our opportunities for giving this brand a fresh start in the fragrance arena. Our initial launch is planned for late 2014. We think our timing with Karl is extremely fortunate as he has been featured in the fashion press and media, rolling up a number of leading-edge lines of clothings and accessories, which are creating brand energy that we look forward to capitalize on in the coming years. We experienced strong growth in several of our core Prestige brands over the course of 2012. As I just mentioned, Montblanc led the way with sales rising 40% as the men's Legend line continue to gain popularity. Jimmy Choo's signature scent lifted brand sales by 30%. And the release -- the rerelease of Boucheron fragrance and the first initiative with Jaipur Bracelet in 2012 gained traction as the brand for sales nearly doubled albeit from a relatively small base in the first full year in our portfolio. In our U.S. operation, we had seen a success as we took over distribution of Anna Sui products. We have also introduced the Nine West fragrance, and we have entered the travel amenities arena in the year of 2012. And we have developed new scents and continued global distribution of specialty retail brands. With the transition of Burberry concluding at the end of this month, we move forward into the next phase, a new chapter for our company's evolution with great enthusiasm. Our core brands are poised for a busy 2013 with a full slate, product launches underway including: A new fragrance from Jimmy Choo called Flash; a new fragrance for Lanvin called Me; and a new one for bebe called Desire, which we have recently debuted. We have also have new products introduction planned for Van Cleef & Arpels, Boucheron and Repetto. Once again, sales will be augmented by a number of brand extension, flankers and special items for the gift-giving holiday season. And as noted in 2014, we will bring new fragrances to market for the Karl Lagerfeld, Alfred Dunhill brand and also Balmain. So before I conclude, I would like to recap why I think Inter Parfums is well-positioned for the future. First, we benefit from a very strong balance sheet, which would enable us to invest in our business and return value to shareholders. We also have the first-class reputation in our industry as a brand builder. We have also a worldwide distribution network, a scalable business model, a diversified and growing portfolio of brands and of course, a very creative and talented staff in the U.S. and in Paris. So this ends our prepared remarks. Operator, we can open the floor to questions.

[Operator Instructions] Our first question is from Joe Altobello of Oppenheimer.

First question is on Burberry. I think in the past, the rest of you had said that you expect Burberry sales in the first quarter to be about EUR 50 million to EUR 60 million. Is that still the case at this point?

Yes, that's exactly the case. There was actually, the transition agreement with Burberry put a cap of approximately EUR 60 million for the first quarter during the transition period. So we certainly expect it to be somewhere between, in that neighborhood, yes.

Okay. And then in terms of the A&P spending, if you go back a few years, your A&P spending prior to your new structure was about 15% of sales. In the last couple of years, it's been 20% of sales. Going forward, without Burberry, what do you expect that line item to kind of look like? Is it going to be close to 20% or more like the 15% historical?

Well, I can't really discuss the future of specific line items, but you're correct. Historically, it was actually anywhere between 16% and 18% depending upon the types of new product launches that we had. It did go up over the last couple of years mainly because of the creation of InterParfums Luxury Brands here in the United States, where we took over our own distribution. With that, of course, we took over all of the advertising requirements that we used to share with our United States distributor. That's one of the reasons why the percentage went higher. Without getting into specifics, I think it will be higher than the historic 16% to 18%, but certainly lower than what we've recently seen because I don't think you need to spend the type of money on some of the other brands that we did on Burberry.

Okay. And just one last one, if I could, in terms of the opportunities for new licenses. You obviously, you have announced Dunhill and Lagerfeld and seem to have a good relationship with Richemont. What is the opportunity right now for new licenses? Are you getting a lot of calls these days from people who are looking to the partner with you?

Yes, we are getting, I will say, we have been getting calls on a regular basis because we are part of the people who are consulted when someone wants to launch a fragrance. And we -- I wouldn't say that we see more calls than before, but there is always 2 or 3 subjects that we are talking to. It's either a brand that is not in the fragrance business or a brand that has original licensing and seems that we can do a better job than the actual licensee. So there is ongoing discussions like the one, like it has always been in our recent history.

The next question is from Linda Bolton-Weiser of B. Riley.

So on your cash flow performance for the year, the operating cash flow being so strong, I had anticipated it would be kind of strong, but it was even bigger than I thought. Can you give some quantification, Russ, as to how much of the Burberry working capital was monetized in 2012? And then -- because I had more of it kind of in 2013. And so I'm wondering just how high to kind of forecast the cash flow going forward, if you really monetized a lot of it in 2012? So if you could give some numbers, that would be helpful.

The only thing that I can really say here is there is very little of the Burberry working capital that was monetized, mainly just a little bit than half -- were monetize in 2012. It was very little because it might have a little bit on inventory, but we are in a transition period. So we are continuing -- we continue to ship merchandise to our customers. They would still pay their receivables in the ordinary course of business, we still needed to buy inventory and to have inventory at the end of the year in order to sell it during this transition period. And the -- that $61 million of cash flow from operating activities excludes anything relating to payments received from the termination of the Burberry license. So there's really very little. The only thing that's going to happen, and it's a little bit unfortunate, but in the first quarter or actually in April, we will have to pay the taxes, all right, on this transaction. And that's going to actually show up as a use of cash from operating activities come April 2013.

Okay. And then can you just -- I mean, I think your results are real good and the 50% increase of the dividend is nice, but your stock is trading down today, and I'm just wondering if being that you raised the guidance for 2013 in January to account for the inclusion of the Alfred Dunhill, and yet you've produced a pretty big upside surprise here in the fourth quarter versus your own guidance. So then essentially, you're sort of lowering the EPS growth rate versus what you would've had in January going forward. Do you understand what I'm saying? I mean, so is it that something has changed about your outlook or that you're just kind of being conservative? Or in other words, why not raise guidance again by at least a little bit to account for the upside in the fourth quarter?

I can try to answer, but Russ, if you want to start first?

Yes, I'll start, and the main rationale is that we increased the guidance. I believe we did it when we announced our sales results. And with that, we indicated that for 2012, we expect to exceed our earnings guidance. As we move into 2013, we specifically put in a range of earnings, nothing really has changed for 2013. The fact that we beat our results or achieved a higher net income in the fourth quarter is, a lot of that is a function of the fact that the sales was also a huge beat, which we announced back a month ago. Jean, did you want to add something further?

Yes, I would like to say that the outlook, we are lying in the middle or almost at the end of the first quarter. And the outlook is very positive and very strong, but we cannot change our guidance every month. So we will review that, I will say, when we release our first quarter which is in May, I guess.

That's correct.

Okay. And yes, yes, fine. Can I just sneak in one more?

Of course.

Just on the use of the cash and everything, I mean because your cash flow is so strong, you have even more cash than we anticipated you would have. So what is your thinking on timing of how long you just want to kind of sit there with your pockets full of the cash? Because obviously, you can work on deals, but you can't control externalities. A deal will either happen or it won't. So can you talk about timing of when you might return that cash to shareholders? And just what your thoughts are and have your thoughts changed at all on what types of things you would look at? Because a lot of these fragrance things you've acquired and taken on in recent years have been relatively small. Are there any big properties you're seeing out there? Or would they all be just a compilation of smaller things?

Russ, you start and I will continue.

You're correct. What we've seen and what we've actually even acted upon is still relatively small. I mean, even Karl Lagerfeld, which required approximately $25 million cash outlay, doesn't really make all that much of a dent in a balance sheet with the cash on hand of over $300 million. Those are the kind of deals that we have been seeing, even similar to what we did with Dunhill, which requires a very, very small capital outlay. As far as what we're going to -- what we're looking at currently, and what we're looking at in the future, Jean, why don't you go on and give a little bit more light on that?

No, I would like to say that there are 2 types of acquisitions. There are the ones that do not cost a lot, like the one that we have done before. But we can and we are looking at other things where you want to buy companies with existing business, with existing sales and earnings. And of course, that's where we can put the money that we have at use. But we have now, for this year, we are looking to do over something like $480 million. This is our latest guidance. We could -- there are not too many, but there are 1 of 2 targets in the perfume industry that will necessitate us to use the cash that we have on hand. We are not against it. We however, as we said before, the idea is not to -- the idea is to keep the money to grow the company. And if we see towards the end of a year that we are able to buy something else or something and not use all the money, some of this money could go back to shareholders, but right now we are really looking at using this money to grow the business.

Correct.

So you would make a decision about returning to shareholders, did you say, sort of by the end of the year, towards the end of the year, something like that?

Yes. We will look at, we will -- yes, we will revisit it towards the end of the year, absolutely.

[Operator Instructions] And the next question comes from Rommel Dionisio of Wedbush.

I wonder if you could just update us on how, maybe a brief early preview on how the Flash by Jimmy Choo and Desire by bebe? I know they debuted in the marketplace. And I wonder if you could just comment on how the initial rollout has gone and consumer suction thus far that you've seen?

The first indication that we have from the market is very good, very strong in the markets where Flash has been launched. Actually, we are way over our internal projections, so we're expecting a very strong first quarter for Jimmy Choo. And your second question was about the bebe Desire. bebe Desire just happened to ship and we have also some very good reaction in the list [ph].

The next question is from Joe Altobello of Oppenheimer.

Just 2 quick follow-ups for Russ. First, just going back to Linda's question about the monetization of the Burberry working capital, could you help us to quantify how much of that you expect to monetize into the first quarter?

The only thing that's going to get monetized there outside is as to the use with respect to the, as I mentioned, the taxes -- which won't even be the first quarter; that's actually going to happen in the second quarter -- are the inventory levels. I expect the Burberry inventory levels to be down at the end of the first quarter to somewhere around the $15 million to $20 million level. That's probably a $30 million or $40 million -- $30 million below where it is at year-end. Other than that, it's really difficult to quantify with respect to exactly when the payables are going to be paid and so on and so forth. But I would imagine maybe $20 million to $30 million reduction of inventory related to the Burberry, and then that's going to be offset by the payment of taxes come April 2013.

So I was going to think in general terms that the money, which we're going to get from the inventory and receivable of Burberry, the cash that we get is going to be offset by the taxes that we'll have to pay, come April 15.

Will more than offset, right, because the tax is $80-plus million, it looks like?

No, the taxes -- well, yes, the taxes are 36%, as we have mentioned, and -- but keep in mind, too, you also have the payment of the payables. So you have the payment of the taxes, you have your ordinary payables, which will be paid in the ordinary course of business. So the payables will pretty much offset the receivables. So then you have this $20 million I mentioned of inventory reduction. That's going to be -- that's going to offset some of the taxes, that will be offset by some of the taxes that will have to be paid later in the year.

Got it, okay. And then secondly, the effective tax rate in the quarter, I haven't tried to calculate this but it looks like on an adjusted basis, I came up with about a 27.5% effective tax rate versus the 35-or-so percent you guys have been reporting in the past. Is that correct or...

It is correct, it is correct. The fourth quarter sales of our distribution subsidiaries are much higher in the fourth quarter than they are at any other time during the year. So what typically happens is you have losses in these distribution subsidiaries, which we cannot take the tax benefits of. And then all of a sudden, those losses reverse themselves in the fourth quarter, all right? And then so basically, you have this profit with no tax expense, all right? Because you're basically offsetting the losses that you didn't book a tax benefit from, all right? That will typically lower your tax rate a little bit, come the fourth quarter. And this year, it was a little bit exaggerated because business was phenomenal in this particular fourth quarter. And the profitability of the distribution subsidiaries was much higher than expected.

Okay. So going forward, you're looking at 35% to 36%?

On an ordinary basis, you're looking at 35% to 36%, correct.

The next question is from Tuknekah Noble of Citi.

I was hoping you can give us a quick update on the travel amenity business? Have you signed in any deals? Is there anything out there that's attractive or do you have any prospective deals you're looking at?

So as we mentioned in our last conference call, we started shipping to a chain of hotel called Sofitel. And again, the first indication that we have are higher than our original forecast. We are waiting to -- right now, we are shipping only to Sofitel. We'll look at opening more hotels towards the end of the year.

Okay, great. Well, I was wondering if you can provide us additional clarity on royalty payments now that you don't have the payments to go to Burberry?

Well, royalty expense has typically been approximately 8.5% to 9% of sales. One of the things that keeps royalty expenses down is our Lanvin brand, is a brand that we own the trademarks. So we don't pay royalties to third parties on that particular brands. So with Burberry out of the picture, I would venture to say you're going to see a little bit of a decline as a percentage of sales, the royalty expense.

Okay. A point or 2 or more or are you able to give us more clarity?

I really am not comfortable with giving specifics on that. But I certainly think it could go down at least by a percentage point.

Great. And finally, you mentioned in the past that you expect the operating margin can get to about 10% this year. And I think that was prior to the extension of the Burberry deal into the first quarter. Can you comment on what you expect operating margin to do this year going forward?

With the guidance that we've put out, our operating margins are slightly above that 10% level. They're probably closer to 11%. As time goes on and as we continue to build our sales base, we are hoping that the operating margins can expand even further. If we're not somewhere between a 13% and a 14% operating margin in the next 2 to 3 to 4 years, I think we'd be a little bit disappointed.

The next question is from Linda Bolton-Weiser of B. Riley.

Just a follow-up on the sales performance. In the quarter, I guess, Burberry actually did a little better than I would've thought. It was down, but not down as much, and it was up like 96% or something in the prior year. So I'm just curious how it did versus your expectation? And I mean, you won't have it going forward, but it plays into the growth that you're kind of -- that's kind of implied for the rest of the business for 2013 because I think you had said 15%-ish for the rest of the business, but with Burberry having done better, you remove more and it kind of means the rest of the business has to be up more in 2013, if you follow what I'm saying?

The current guidance that we have out implies a growth of the business outside of Burberry. It's somewhere around 15% to 16%. That's what we have said before. That's -- we still are at that level. And if you pull out your estimates for 2013 with respect to Burberry, you're going to come up with the same numbers. That's as far as we can go right now. Jean just mentioned that as we moved into the first quarter, we were talking about Jimmy Choo. Sales are better than we expected internally. We're going to evaluate that guidance that we have out. As we move closer to the end of the first quarter, we can have a little bit more visibility. And we will adjust at that time if we see the need to.

We have no further questions in the queue at this time. I would like to turn the floor back over to management for any additional remarks.

Thank you. Again, thank you all for your participation on this conference call, whether you're on the call live or listening via our webcast. As always, if anybody has additional questions, I am always trying to make myself available by phone. Thank you, and have a great day. Bye.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.