Inter Parfums, Inc. (IPAR) Q3 2015 Earnings Report, Transcript and Summary

Greetings and welcome to the Inter Parfums, Inc. Third Quarter 2015 Conference Call. At this time all participants are in a listen-only-mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, Mr. Russell Greenberg, CFO and Executive Vice President. Thank you sir, you may begin.

Thank you, operator. Good morning and welcome to our third quarter conference call. Following the financial review, Jean Madar, our Chairman and CEO, will provide a business overview and then we'll move on to your questions. Before proceeding further, I want to remind listeners that this conference call may contain forward-looking statements which involve known and unknown risks, uncertainties and other factors that may cause actual results to be materially different from projected results. These factors include, but are not limited to the risks and uncertainties discussed under the headings forward-looking statements and risk factors in our Annual Report on Form 10-K and the reports that we file from time to time with the Securities and Exchange Commission. We do not intend to, and undertake no duty to update the information discussed. When we refer to our European based operations, we are primarily talking about sales of prestige fragrances conducted through our 73% owned French subsidiary, Inter Parfums SA. When we discuss our United States based operations, we're primarily referring to sales of prestige fragrance products and specialty retail fragrance products, which are all conducted through our wholly-owned domestic subsidiaries. Moving on to third quarter results, net sales were $138.9 million, up 3.5% compared to $134.2 million in last year's third quarter. As comparable foreign currency exchange rates, net sales increased to 11.4%. Sales by European based operations rose 6.5% to $110.1 million from $103.4 million. As comparable foreign currency exchange rates, net sales increased 16.8%. U.S. based operations generated net sales of $28.8 million, down 6.5% compared to $30.8 million. Gross margin was 61.8% of net sales compared to last year's quarter, 56.1%. For European based operations, gross margin was 64.8% compared to 58.7%, and for U.S. based operations, gross margin was 50.3% up from 47.4%. SG&A expense as a percentage of net sales was 41.9% compared to 42.2%. Net income rose 48% to $27.6 million compared to $18.7 million. Our operating margin was 19.9% in the current third quarter, up from 13.9%. Net income attributable to Inter Parfums Inc. rose 28% to $14.2 million or $0.46 per diluted share compared to $11.1 million or $0.36 per diluted share. Gross through the first nine months of 2015, we've generated net sales of $350.2 million compared to last year's $374.1 million. While that is a 6.4% drop in dollars, as comparable foreign currency exchange rates, net sales actually increased 1.7%. Net income attributable to Inter Parfums Inc. rose 9.4% to $28.6 million or $0.92 per diluted share for the 2015 nine month period compared to $26.1 million or $0.84 per diluted share for the same period one year earlier. Jean will expand further on sales and brand activities, so I will focus on certain P&L points but I prefaced this discussion by again saying that our reported sales are impacted by changes in foreign currency exchange rates. A strong U.S. dollar has a negative impact on our sales. However, earnings are positively affected by a strong dollar because almost 50% of net sales of our European operations are denominated in U.S. dollar. Almost all costs of our European operations are incurred in Euro. Thus the increase in gross profit margin for European based sales was primarily attributable to the strength of the U.S. dollar relative to the Euro. The average dollar/euro exchange rate for the three and nine months ended September 30, 2015 was 1.11 as compared to 1.33 and 1.35 for the three and nine months ended September 2014 respectively. The overall trend of increased gross margin for U.S. based operations is also due to a greater concentration of higher margin prestige brand product sales as compared to lower margin specialty retail and niche market sales. Selling, general and administrative expense as a percent of sales rose to 42% for both the current and prior year's third quarter. For European operations, SG&A expense increased 3.1% in the third quarter while a constant currency sales were up 11.4% giving us some nice leverage over our fixed expenses. For U.S. operations, SG&A expense increased 0.9% in the third quarter. Because of the growth in prestige brand product sales that are now under license which bear royalty and advertising expenses. Promotion and advertising included in SG&A expense was 15.3% of net sales in the current third quarter as compared to 15.5% in the third quarter of 2014. As we regularly point out, a greater portion of our advertising spend is budgeted for the second half of the year with the highest percentage in the fourth quarter. In last year's fourth quarter for example, promotion and advertising represented approximately 25% of sales. Our promotion and advertising budget for this year's fourth quarter is expected to also be in that neighborhood. Royalty expense represented 6.8% of net sales for the current third quarter as compared to 7.4% in the corresponding period to last year. We currently anticipate royalty expense to approximate 7% of net sales per year. While some of the changes in non-operating items did not move the needle much, they are still worth noting. As expected, we had an increase in interest expense amounting to about $500,000, primarily related to the financing of the acquisition of the Rochas brand. And finally our tax rate was 33% versus 32% in 2014 third quarter. Our financial position remains very strong. We entered the final quarter of 2015 with working capital of $353 million including approximately $215 million in cash, cash equivalents and short-term investments. Resulting in a working capital ratio of over 4:1. The $84.6 million of long-term debt on our balance sheet relates to the five-year term loan we used to finance the Rochas acquisition. As we discussed in August, to reduce exposure to rising variable interest rate we entered into a swap transition, effectively exchanging the variable interest rate to a six straight of approximately 1.2%. We continue to expect net sales to be in the range of $460 million to $470 million, resulting in net income attributable to how they perform - of $0.95 to $1.0 per diluted share. Our current guidance factors in negative market conditions in China, Russia and Brazil that have prevailed throughout this year. And as always, our guidance assumes that the dollar remains at current levels. Jean, please continue.

Thank you Russ, and good morning. Once again, Jimmy Choo was our fastest brand for the quarter. With brand sales increasing 46% in local currency and 23% in dollars. Jimmy Choo which debuted late in 2014 is in great profit. You may be interested to know according to NCB, the market researcher, Jimmy Choo was the seventh best-selling men's fragrance in the first six months of this year in the United States. We launched other brand statement initiative elicit as it began in the U.S., in the UK, in the Middle East, and Europe and Australia, and it is profit-based extensive ad campaigning featuring singer, actress, model, Stacy Aurora. And the U.S., the new scent is May season of 24 hours of this elicit will be debut in Western Europe, Asia and Russia next year. Regarding Montblanc, Montblanc brand sales for the quarter were given a lift with the launch of Lady Emblem coupled with continued success of a legend collections and emblem men's line which together produced a 25% sales increase in local currency and 5% in dollars. In the coming year, we will be expanding our highly popular men's legend lines. With Montblanc collaboration has been a huge success for us. And we now have many more years to nurture the growth of our Montblanc business with less signing of the five-year extension to our license agreement. The original agreement was signed in 2010 and granted us the exclusive worldwide license rights to create reduce and distribute perfumes and ancillary products under the Montblanc brand for December 31, 2020. The new ten year agreement extends the partnership for December 31, 2025 on the same terms. Now on Lanvin, Lanvin sales rebounded in the third quarter and were up 7% in local currency but down 10% in dollars with some of the gains coming from the launch of [indiscernible]. We have mid-sized brands, we have also good performances by Boucheron where local currency sales were at 34% and over 100% respectively for the tranches. For the coming year we have tried to launch new women's and men's - and of course, our first good segment for women, we did next year. The USPs of the Coach brand browses the market followed by Japan. So our current plan of Coach near global launch in the third quarter 2016. Regarding Rochas, we have some minimal initial sales of Rochas segment in the third quarter, and even some royalty revenue. So far we have overall advanced website and redesigned some of the fragrance packaging and visual solid brand. Rochas offices have moved into our Paris headquarters and our first new women scent for the brand is Glen of 2017 with 50 country launch. Moving now to the U.S. operation, Hansa [ph] brand we have gentlemen, the fragrance and exquisite duties for our next year or in the third quarter. We have also I think sort of extra-ordinary women's fragrance. And also coming to market, two new agent look at the central women and new scent for the MSP brand. We'll be launching new scent for young men and women for the Hollister brand international, and of course we launch fragrance called Thirsty Stink, a men's scent and its schedule to roll out internationally in July with women's fragrance and the women's with very, very early 2017. I think because of older brand, and finally this is our last conference call for the year, so listen, I want to wish all of you the very best for the holiday season and the coming year. So with that operator, well you can open the call for questions.

Thank you. [Operator Instructions] Our first question comes from the line of Wendy Nicholson from Citi. Please go ahead with your question.

Good morning, this is Samantha Berker [ph] sitting in for Wendy today. I hope you can provide a bit more color on margins. What happens when the dollar stabilizes or falls and how should we be thinking about that looking forward?

As we move into 2017 because 2016 it appears that the entire year is going to end with an average exchange rate of somewhere right around that 1.1 that I had mentioned earlier. So the comparison to 2014 where the average was between 1.33 and 1.35, that is what gave rise to this year's almost over 500 basis point increase in the gross margin for our European operations. As we move into 2016, if we assume that the dollar remains at the current levels, you're going to see the gross margin should level off at the same level where it was for the 2015 full-year. And when we issue our guidance which is going to happen next week I guess, we're going to probably assume again that the dollar stays at current levels and that's how we're going to build our guidance for next year. So in that environment unless there is going to be any more huge volatility, we would expect margins to relatively stable as we move from 2015 to 2016.

Got it. And in terms of margin extension going forward excluding those currency impacts, both growth for franchise a favorable mix shift in terms of margin or are there areas in which you could focus on cost savings. Just generally speaking, how should we be looking at this?

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

Got it, and lastly switching gears a bit. If you could talk a little bit about your advertising and promotional spend, have you measured the - you're spending and are there particular brands that respond better to different types of advertising and how do you make those decision?

We follow this very carefully. In order to achieve the level of sales of Jimmy Choo, we have spent higher percentage of sales of Jimmy Choo. We spent this money in the countries where the brand user is strong which is U.S. and UK. We reduced our spending on a monthly basis, brand by brand, market by market. So we are very, very - we can be very reactive and if we see that basically - if we see that the product is better accepted than anticipated, we recent moment [ph].

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

Thank you.

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

Good morning guys. I was just wondering if you could talk a little bit about the lessons you learnt from Karl Lagerfeld, I think that's - maybe, initially sales were good but the sell through wasn't as great as you expected. Did you learn anything there that might be helpful in sort of these major new brands that you have for next year approach that might be relevant to approach?

I can say that won't get quite a reception for Karl Lagerfeld. We expected better sales through than that. But we learnt from our lesson and I think that we'll continue with limited amount of up sales with Karl Lagerfeld. We will come up with more fine cost, we will decrease the retail price of Karl in order to be more accessible. I think that our executions were too high on Karl at the end of the day, that's why we have such a diverse portfolio and sometimes we are more conservative on certain brand and two or three - but at the end of we see the results and where we want to increase the sales.

And other question just on the gross margin, obviously you pointed out about the foreign exchange, I understand how that works but could you talk - was there any meaningful difference in the proportion of gift sets that might have impacted perhaps - because typically that drags down your growth rate in the first few orders. I was just kind of wondering did that change at all or is that the same?

No, we have this year the same months in percent, in sales. [Multiple Speakers]. But we assure that the gift sets which are in promotional because we give away one or two sort of - we recollect and we're seeking in the department. So usually bring down the margin. This has been taken into account and in certain markets like the U.S., third quarter is almost all net of gift set. But we have not decreased the amount of gift set which you're comparing to last year.

Okay, thank you.

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

Thank you. Hi, guys good morning. Just wondering back to some of your trouble markets; China, Russia, Brazil. Obviously, these have been pretty weak throughout most of this year. I guess Brazil was more of a late comer to that party but is there any sense that things are getting better in those markets or your assumption that we're going to continue to see some weakness into 2016?

I would like to differentiate each market; Russia, Brazil and China. I would like to start with China. China is a very important markets, we have industry in the country for almost 20 years. And the fact that we have two brands, [indiscernible], they are a good seller in China, produced the problems that we know today in a sense that they less - recently less business in Hong Kong and Mainland China for the first nine months of the year. It is true that a lot of Chinese customers and struggling and we've seen some pick up of business in Japan and Korea from Chinese customers. But when we put all these together, we have some significant decrease of business in China. I will say that in Russia, rather the issue with the exchange rate of the Ruble, we had to make some adjustment in Russia. And then we say that we have some opportunities in Russia, especially going into next year 2015. We still have something like - it still has two brands in the Top 5 brand sold in Russia. And we have some big trends next year with other brands. And Brazil, how should I say - Brazil is a very complicated because of exchange rate and not enough distributions, so we are very affected. But again, the problem of China is the largest issue. Russell you want to complement what I say.

I think you touched each market very well, so I think you were 100% right. The only other thing that you may want to talk about is how that affects some of the duty free markets in those territories.

Yes, of course, because of duty free being such a big business in major, the consequence of having big business even though Chinese are troubling, we have seen some collateral damages in this part of the world. So we have to continue to spend for these markets that we continue to spend and we view it carefully our plans for mixture, next year in China and Hong Kong. We will maintain our level of spending in this part of the world. But again, the world that we see in Korea and Japan are much enough to offset China today.

Got it. That's very helpful. Thank you.

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

Absolutely, okay. And then in terms of next year's wealth, is it fair to sort of talk about rough magnitude of the sales impact you expect next year from Rochas on one side and then new licenses, you're going to have probably Hollister on the other side. Which one do you think with have a bigger impact on sales next year?

You mentioned before that we're - we are letting on. Rochas, we have full year but not with new products but we have a full year of business and what we've seen so far is quite promising. We are expecting a lot from coach. And - but this will happen in the starting second half of next year. And the two of the big launches either best combined [ph]. So on the Hollister and Rochas, we'll be the catalyst for 2016. That we'll reinforce our local base business, each of the brands that we have will have either the same curves or new launches. So we are looking - we are not disclosing yet among us. We are looking at 2015 with confidence.

But the contribution from Rochas will be good than the other pretty combined next year given now the full-year.

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

Thank you.

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

Hi, thanks for taking the question. Quickly, so is there any changes in the product calendar for 2015?

In the product counter?

If there are any changes - Jean went through on his remarks.

Again, as I said, Dunhill, Montblanc, Jimmy Choo will have flank curves of only free runs. The depth that is for the growth will come from the new license and we have four license of businesses, the Coach, Hollister being second, Abercrombie and Rochas even if we started three or four months of sales and next year we'll be fully of Rochas. So these are the four new addition to the portfolio and we certainly expect a bulk of increase of sales. I will not give more details or numbers by brand. I don't think it is time to do this now.

Okay, thanks for that. And what kind of reaction are seeing from retailers adding this is a holiday season with regards to inventory purchases?

This is a good question. Once we've seen - I'm talking about from an international point of view, is quite light inventory in Inter Parfums. We have shipped our Christmas gifts early. I think we shipped it in August and it has been - since October. So we anticipate a very good sell through of the gift set and we - even the warehouses is quite clear. [Multiple Speakers] Which is a good sign, it's a good sign, it means that either sales is good. We will replenish quickly for over 2016. Did that make any sense to you?

Yes.

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

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

Hi guys, how are you?

Hi Linda, better, thank you.

So I just wanted to ask about - I know you haven't all the guidance for next year but a lot of the things you mentioned are kind of for the second half. And I think when we look at 2015, it was also kind of a second weighted year in terms of the growth. Is that kind of what we're looking at for 2016 and in particular, the first quarter 2016 I guess via listed launch globally, beyond North America, I guess they have the big driver. But what else is there like early in 2016 to drive sales growth?

So in the first quarter of 2016 you're going to have Dunhill, an absolute roll out. You can have a roll out of a lot of existing one. So we've - I tend to agree with you - we will see at what point it's impacting the second half, similarly has been shared than the first half.

Okay.

Russ, you want to add something on that?

No, I think you're right, and as Linda mentioned, one of the biggest launches that we've had this year is the Jimmy Choo list of launch which will roll out to the remaining geographical areas that it wasn't initially launched in 2015. We'll be launching in those other geographic locations in early 2016.

And do you excite a little bit of Abercrombie and Hollister shipments in the second quarter to start in second half.

Yes, I think so. I think we can have, we will have some sales in the second quarter. As of now we're on that behind so you should be able to get some sales in the second quarter.

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

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

Okay, sounds good. [Multiple Speakers]. Okay, thanks.

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

Thanks, good morning everyone. We have a couple of questions. The first, if you could just follow-up on the travel retail comment or the duty free comments. Is there any changes in self-based or brand priority within that channel that you're seeing in the worldwide, a bit regardless of the traffic such as any changes the product? And secondly, with respect to your output for holiday, how should we be thinking about the pricing and the promotionally cap within the fragrance category? How you expect to tackle looking at some of your peers. Thank you.

Regarding the duty free, it is true that when you'll - local market is a successful. You're going to have a week good response from the GDP market. They will allocate more spacing to most nature in import. And we've seen that Montblanc caused Jimmy Choo, it hasn't been able to gain the full backlog in the space, it's agile, which we wear think about to get. So our presence, our physical presence in the duty free is definitely improving, even for similar brand like Dunhill as a former criteria, distributor to UK, Dubai which offer [ph]. You can see that the total presence of Inter Parfums brand are increasing. And this is due to successes of the product in local market. The second question is more about department store, so Russ you want to answer this one?

No, I think we kind of covered it before. The inventories of department stores are relatively light, by end was relatively early. So it's on a brand by brand basis what we've seen as far as initial sell through has been very positive. We're hoping to get some activity as we move forward into and get closer and closer to the holiday season. But overall things have been generally positive in the United States department market.

Thank you.

Thank you. And then we'll add that when we said that it was positive in the U.S. department store but it's almost the same situation in Western Europe, in France, in UK and in Germany. The markets that are more complicated as well as the emerging markets. The mature market such as U.S. and Europe are…

[Operator Instructions]

Okay, maybe we take a last question. If there is one? No, okay.

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

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

Thank you, ladies and gentlemen, this does conclude our teleconference for today. You may now disconnect your lines.