Inter Parfums, Inc. (IPAR) Q4 2016 Earnings Report, Transcript and Summary

Greetings, and welcome to the Inter Parfums’ Fourth Quarter 2016 Conference and Webcast. 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. I’d now like to turn the conference over to your host, Russell Greenberg, Executive Vice President and Chief Financial Officer, for Inter Parfums. Please go ahead, sir.

Thank you. Good morning, and welcome to our 2016 year-end conference call. As usual, I will begin the call with a financial overview and then Jean Madar, our Chairman and CEO, will discuss current business, recent developments and upcoming plans. After that, we will take your questions. Before proceeding further, I want to remind listeners that this conference call may contain forward-looking statements, which involve known and unknown risks, uncertainties, and other factors that may cause actual results to be materially different from projected results. These factors include but are not limited to, the risks and uncertainties discussed under the heading forward-looking statements and risk factors in our annual report on Form 10-K, and the reports we file from time-to-time with the Securities and Exchange Commission. We do not intend to, and undertake no duty, to update the information discussed. In addition, Regulation G codifications for the use of non-GAAP financial measures, 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 discussion is important supplemental measures of operating performance to investors. The information required to be disclosed for the presentation of non-GAAP financial measures is disclosed in our December 31, 2016 annual report on Form 10-K which has been filed with the Securities and Exchange Commission. This information is available on our Web site at www.interparfumsinc.com. When we refer to our European-based operations, we are primarily talking about sales of prestige fragrance products conducted through our 73%-owned French subsidiary, Interparfums SA. When we discuss our United States-based operations, we are primarily referring to the sales of prestige fragrance products conducted through our wholly-owned domestic subsidiaries. Now moving on to comparable fourth quarter results. Net sales were $134.8 million, up 13.9% from $118.3 million. At comparable foreign currency exchange rates, net sales increased 15.3%. Sales by European-based operations rose 12.8% to $99.9 million from $88.6 million. And at comparable foreign currency exchange rates, net sales increased 14.6%. For United States-based operations, we generated net sales of $34.9 million, up 17.3% from $29.7 million in the prior year. Gross margin was 63.7% of net sales as compared to 64%. SG&A expense, as a percentage of net sales, was 59% compared to 60.4%. Operating income rose 26.5% to $5.4 million from $4.3 million. Net income attributable to Inter Parfums, Inc. rose 111% to $3.9 million compared to $1.9 million. And net income attributable to Inter Parfums, Inc. per diluted share rose 117% to $0.13 from $0.06. Thus, full year net sales increased 11.2% to $521.1 million from $468.5 million in 2015. At comparable currency exchange rates, those net sales increased to 12.1%. You will recall that our first quarter results included the effect of a pending settlement of a tax assessment with the French tax authorities of $1.9 million or $1.4 million net of non-controlling interest. Thus, in 2016, net income attributable to Inter Parfums, Inc. was $33.3 million or $1.07 per diluted share, inclusive of the tax settlement and $34.7 million or $1.11 per diluted share, exclusive of the tax settlement. Net income attributable to Inter Parfums, Inc. in 2015 was $30.4 million or $0.98 per diluted share. We covered key sales drivers in our releases, so I will focus on certain profitability factors. As I just mentioned, our consolidated gross margin for the 2016 fourth quarter was 63.7% of net sales, which looks a lot like the gross margin achieved in the first and second quarters. As you may recall, in the third quarter, we shipped significantly more holiday gift-sets and other promotional items, which were sold at lower margins than regular merchandise, which happened to have depressed gross margins for that third quarter. But for the full year, gross margin was 62.7% of net sales, up from 2015’s 61.8%. SG&A expenses increased 11.3% and represented 59% of net sales for the final quarter of 2016, as compared to 60.4% in the fourth quarter of 2015. For the full year, SG&A expenses increased 13% as compared to 2015. And as a percentage of sales, SG&A expenses were 50% in 2016 as compared to 49% in 2015. The increase is primarily related to higher promotion and advertising expenses. As planned, we invested heavily in advertising and promotion to support new product launches, as well as to build worldwide awareness for our portfolio brands. In 2016, promotion and advertising included in SG&A expenses, aggregated $99 million or 19% of net sales, and that’s up from $83.8 million or 17.9% of net sales in 2015. There were two non-recurring items that were included in our fourth quarter and full year operating results. One that benefits and the other detracts from operating income. In December, we reached an agreement with the Balmain brand, calling for the buyout of the Balmain license agreement, effective December 31, 2016 in exchange for a payment of $5.7 million. As a result, we recognized a gain of $4.7 million in the fourth quarter. Payment is expected by the end of April. And once our three month inventory sell-off period terminates on March 31, 2017, Balmain has agreed to purchase all remaining inventory and tangible assets. The second item relates to the Karl Lagerfeld brand, for which product sales had not met with our original expectations. During the fourth quarter of 2016, we decided that we will likely exercise our rights for an early termination of the Karl Lagerfeld license in 2014, rather than continue the license through its original expiration in 2032. As a result of this shortened expected life, we recorded an impairment charge of $5.7 million for 2016. And I am sure that John will talk more about our plans with respect to the Karl Lagerfeld license in his remarks. Moving on to our balance sheet, we closed the year with working capital of $338 million, including approximately $256 million in cash, cash equivalents and short-term investments. Our long-term debt, including current maturities, aggregated $74.6 million at December 31st. Jean, please continue.

Thank you, Russ and good morning everyone. I am very pleased with our financial performance for 2016. I would like to point out that with 257 full-time employees worldwide, Inter Parfums generated $521 million in sales in 2016, which equates to almost $5 million in sales to employee, which is quite an achievement. I am also proud that we have grown our business in our two largest markets, which are Western Europe, where sales grew by 23.5% and North America where sales increased 19% over year-over-year. In Asia, our third largest market, sales were 4% ahead of 2015. And as I noted on our third quarter conference call, Korea and Japan are making up some of the shortfall in China where the market remains depressed. Our next three markets are just about the same in size give or take a few million dollars; Central and South America, the Middle East and Eastern Europe. And for the year as a whole, our sales in Eastern Europe were down from last year, owing to Russia’s economic problems, resulting from lower oil prices and a devalued currency. Before reporting on our 2017 line-up, I want to remind listeners that the 2016 growth drivers for European operation were coming from Montblanc, Rochas and Coach Brands. And for U.S. operation it was coming from Hollister, Abercrombie and Dunhill. Moving on to our launch schedule for 2017. For Montblanc, we have the third Legend pillar, called Legend Night that will debut at the end of this year and roll out further in 2018. You may have seen a large piece in Women’s wear daily, where our second Legend flanker, Legend Spirit, was among the top five new fragrance launches in the U.S. in 2016. And our new Coach signature fragrance for women, also made the list. We’ve got our first Coach scent for men debuting in the fall of this year, and we’re continuing the rollout of the Coach signature scents, both the Eau de Parfum, primarily for the Western market, and Eau de Toilette geared for Asia, where the scent is unveiling in two major markets, China and Japan, this year. For Jimmy Choo, we have two initiatives in the work; one is an extension of a signature scents for women; and the other is an extension for Jimmy Choo Man. For Lanvin, the international rollout of Modern Princess is continuing, and we are preparing still another interpretation of Eclat d'Arpege, our premier Lanvin scent. We’re also very excited about Mademoiselle Rochas, our first new scent for the brand Rochas, which is initially debuting in 12 countries in the first half of 2017, followed by further international geographic rollout in the second half of 2017. For Boucheron, we have six scents collection coming to market. And for Van Cleef, we are adding a new juice to the collection Extraordinaire line. We also have some new ideas for the Karl Lagerfeld brand. We will introduce two new fragrances, men and women, this year for Karl Lagerfeld at more democratic prices. And we plan to reinvigorate this brand by changing the positioning and introducing this new jewel that I was talking about, where they will be introduced during the summer. Moving on to the U.S. operations, Abercrombie & Fitch and Hollister fragrances should continue to be growth catalysts in 2017. As we have pointed out, in international markets, these names are viewed as American fashion brand, so they are being sold in perfumeries, beauty boutiques, departmental and specialty stores and of course, travel retail. This month, we have the women’s edition of Abercrombie, First Instinct, debuting exclusively at World Duty Free in the UK, where it is doing extremely well. From April, next month, the international rollout begins. We also have a new dual launching internationally for Hollister. And Dunhill, we'll be launching Desire Extreme this year, and Oscar de la Renta will have also a new fragrance for women, called Bella Blanca, that will be hitting the market later this year. So as you can see, we have a lot of launches in 2017. And I was going to forget Anna Sui, which will have also a new fragrance introduced in the third quarter of 2017. So to summarize, with our rich and diverse portfolio of brands, we are not dependent on one or two for our growth or success. We also recognize that all brands are not treated equal. Cutting ties with smaller brands can be the right move at the right time. At the same time, we are also on the lookout for additional brands to partner with or to license or to acquire. We’ve got the balance sheet to make that happen. Our primary focus, both in Europe and U.S., is on growing our high margin prestige fragrance business, and that is also the focus of our acquisition strategy. We have an effective efficient distribution network, reaching 100 countries and in several of the most important markets, we own or control the distribution organizations. And of course, we have a great talent and resource reservoir. So now, operator, you can open the floor for questions.

Thank you. At this time, we’ll be conducting the question-answer-session. [Operator Instructions] Thank you. Our first question is from the line of Linda Bolton Weiser with B Riley. Please proceed with your questions.

You have quite a line-up of new launches for 2017. Can you just, I don’t know if you said the timing of the two Jimmy Choo launches, the man and the women. What’s the timing of those?

Jimmy Choo, so we are launching as we speak this quarter, the extension of the women’s fragrance, called Jimmy Choo Loo. And the men’s extension will be launched in the third quarter. And if you’re talking about Jimmy Choo, I can tell you that for the first two months of the year, we are doing very well. We are very opportunistic on our business of Jimmy Choo.

And then when you launched the Montblanc Legend Spirit, I guess that was in second half last 2016. My expectation was that it was just a small flank of sort of thing, but it ended up being pretty significant as a driver. So, is the Montblanc Legend Night going to be on the scale of Spirit, or is it going to be like a more minor launch? And then what’s the timing of that launch?

The Legend will be launching really new pillar for Legend with Legend Night. We have been also surprised by the success of Spirit. So, we expect also a nice growth in the Montblanc in 2017. Russ, do you want to add something?

The only thing that I would correct, the Legend Spirit was actually launched in early 2016. So, we did have the product out for most of the year. And as Jean said, its success caught everybody by a little bit by surprise. It turned out to be a much more successful launch for a flanker than we expected.

And when does the Legend Night launch?

Legend Night will be launched in certain markets in third quarter.

It’s actually going to be towards the very end of the year in certain markets, and then continue its geographic expansion into 2018.

And then can I just say a few, in the Russian market, a lot of other small companies have been having difficulties getting on a more steady track of growth there, given the market disruption. Are you selling in Russia through distributors? And is the issue that the distributors are having problems financing inventory, or is it the end demand that has dried up in Russia, or is it both?

No, we do not have too much an issue with our distributor, because it happens to be that our distributor owns the 950 stores in Russia, and they own, which represents 40% market share. The name of the chain is called [indiscernible]. So, the problem is not really the distributor, the problem is really the end consumers buying less, prices are more expensive in rubles. So we’ll have and that’s what we are doing for this year, we’ll have to heavily spend in advertising to regain some market share. And that’s what we will do with all our new launches for Russia this year.

And then finally, can I just ask you about the North American market. And Macy’s has had some store closures, and department store traffic has been harmed in some ways due to less tourist foot traffic. How is it that you’re succeeding so much and how is your distribution in the specialty, like Alta and Sephora. Are you fully distributed there as well as in the department stores?

Our business in department stores is following the trend. It’s quite challenging; but of course, the business is at Alta and Sephora is growing at a very fast pace, especially with Alta more than Sephora. And we are lucky that the brands that we have are doing also well in department stores. For instance, we launched Coach at Macy, and it was very successful. So, I will say that we are -- even though the business in U.S. department store is not great, we have been okay this year. But we are looking at this very carefully. We do not want to be over-dependent of a department store. That’s why we will develop more programs for stores like Alta. Russ, you want to add?

No. I think you hit it. The two main issues is that the department store business is losing traction to those specialty stores. We have our products hitting in both. But it really is the success of the brands and the successes of the launches that is driving the results that we’ve been reporting.

The next question is from the line of Joe Altobello with Raymond James. Please go ahead with your question.

First question, I guess, is more of a big picture one. What went wrong with Lagerfeld?

What went wrong with Lagerfeld, I think we miss-positioned Lagerfeld. We wanted to recreate a product that was quite expensive geared for very key market where the brand today is we think more accessible. And that’s why the new products that we’ll be launching are 25% lower in prices, so it’s a more democratic, a little bit or so, more younger customer. So, we still think that we are going to find some growth in the business. We just need to reposition and the adjustment, the accounting adjustment that we have made is due to a test, and we call it, impairment test. But it’s not a reflection of what we think of Karl Lagerfeld. Like I said, these are brand that we’ll continue. But we definitely need to reposition it. And that’s what we are doing in order to find the growth for this year and next.

And in terms of China, you guys talked about that market still being depressed. If you hear from other beauty companies, they talk about some fairly strong growth in China. So, I am just curious is this weakness unique to fragrances, because most of the other beauty companies that we speak to are more make up skincare.

Absolutely. Make-up and skincare is doing much better. I see the orders coming back from China, I see the program. So, I think that we see the light at the end of the tunnel for China. But we are not going to see the growth that we’ve seen in the years, in two years or four years, before. And China becomes an expensive market, you need to advertise heavily. And our business will grow at, in 2017, at a modest rate. But we will see growth in China in 2017. Russ?

No, I agree there. I think the most important point that you made is that, although we do see some very modest growth in China, going forward, it's nowhere near the levels of growth that we have seen in years pass.

So the weakness is relegated to the fragrance category, it sounds like?

Yes, and it is. And that’s why we have spent, in 2016, we have just I think has increased a lot. I think we spent close to $100 million in promotion and advertising in 2016, because we need to increase the market share in difficult countries like China, and like Russia.

And just one last one for Russ, I guess if you look at your French subsidiary’s guidance, which they gave back in January and again reiterated today. They are looking for sales this year about €385 million to €390 million. And I guess if you back into a U.S. dollar number that implies some pretty massive growth for U.S. business. What’s going to drive that, call it, 20% growth in your domestic business?

Well, I’m not sure exactly what rates you’re using…

Dollar [indiscernible] to the euro…

For the last two years, the average was somewhere right around 111. So, it’s very difficult to pinpoint. I don’t think it means massive increases for the U.S., but it certainly does mean reasonable or at least low double-digits or high single-digit growth for the U.S. side of the business. And most of that is coming from the newest lines that we have, which were launched last year; the Abercrombie and the Hollister lines, are what’s going to be driving this continued growth going into 2017. In addition, Dunhill should have a little bit of an easier comparison. But again, I’m not -- we’re not looking at massive growth here. My model doesn’t show massive growth, it shows in the high single digits.

Our next question is from the line of Frank Camma with Sidoti. Please go ahead with your question.

Can you talk a little bit about just for kind of follow-up for the last question, touched on a little bit about the promotion expense, I mean, absolute dollar and percentage going up. But last year, you have a number of new launches. I understand you have a number of this year. But is that same rate that we can expect going forward that level of support? I mean, do you -- because you, obviously, that affects what kind of leverage you get on your SG&A, so I just want to…

Yes, Russ, you want to start...

I think it’s a trend that has been going on for the last several years. We reached for our -- included in our SG&A was around 19% of our sales, was spent on promotion and advertising compared to 17.9%, just a little under 18% the prior year. As Jean mentioned just two minutes ago, with launching new product into countries like China or where the markets are relatively weak or even to support the brands in most of the major markets around the world, we really have to support it with promotion and advertising. And even though we see in our numbers, 19%, there’s also a significant amount of dollars that are spent by our distributors in local markets, in connection with promotion and advertising. This is part of our business. This is the way we drive the business. It’s the way brands grow and gain the name recognition that we need in order to keep these trends moving along. So, 19% is very reasonable. I wouldn’t be shocked if it grew a little bit, and went to almost 20%. I think that’s the trend that we’re on, at least, over the last several years.

And have you found digital marketing at all effective in this category or is it…

Absolutely. I will say, last year, between what we spent and what our distributor spent, 25% of -- 20% at least of this budget was spent on digital. And to go back to what Russ said, we think it’s very important to support our brands in order to continue to grow the market. We could make more money if we were short-side. We could be more profitable by cutting a point or two of advertising, but it will be a very bad mistake. We need to support all our brands. Coach is new, and we are overspending much more than our obligation our contractual obligation, on coach. We are overspending much more than our average of 20% on Oscar. We are also overspending on Jimmy Choo, and we want to continue like that. And let’s not forget that we have to fight against larger company, while on single source, lot of new products. So, in order to be competitive, we’ll continue the spending.

My last question is just on your infrastructure as a whole, regardless of promotion. But just as far as adding new brands, I am assuming it’s still true that you wouldn’t have to really add much as far as incremental fixed cost if you were to bring on a new brand assuming. Is that correct?

Absolutely, I mean, I don’t have numbers. But we could add $50 million or $100 million of business with new license without changing anything in our SG&A. Russ, you agree?

Yes, certainly, without any significant changes. Absolutely.

Significant changes, yes.

[Operator Instructions] The next question is from the line of Vahid Khorsand with BWS. Please go ahead with your question.

Could you provide an update as far as Coach goes in Japan, and how much do you think at least the approach in Japan would have on sales?

It’s a little bit early, but I can tell you that we are overall budgeted. And for Japan, we launched also in Singapore, which was quite good. We’ll continue -- 2017 is really the rollout of Coach that Coach, besides being a very strong American brand in America, is a very strong brand in Asia. So, Asia is a major, major market for Coach. So we are -- what I can tell you without disclosing the precise number is, Coach is over our target in all the countries that it has been notched. And we will continue with the men’s line in August or September. And we feel we will start shipping the men’s line in older markets. So, we’ll have even a stronger presence when we get to the Christmas season.

And then could you provide an update on Rochas and other markets you could be going into?

We will be launching the new Rochas in 12 countries next month; definitely Spain and France, which are the two very important countries for Rochas; we’ll continue with the rest of Europe, Belgium, Switzerland, Portugal; then we will launch in the Middle East, Saudi Arabia, Dubai, Kuwait, and of course South America, Argentina, and Brazil. We’ll have a second wave towards July-August, with the rest of the countries. As you know, Rochas is not a license it’s a brand that we own. So of course we do not have to pay royalty. So we are spending. We are able to put more money into advertising. And I think that it will help the launch of a new fragrance.

And going back to the conversation on the big-box stores, I know you were talking about your presence in specialty stores. But have you done any internal research on how much of your sales come from the lower-tiered malls? And if you have any plans into combating that, and when they eventually do shut down. I mean, where do you see the future of your sales coming from?

Well, I mean today, the sales that you see in any big-box stores is really coming through diversion, for the most part. Other than if there are lines that are being closed out, or discontinued, you might find them. But otherwise, it comes through diversion. And we take it very seriously. This is a problem that has been in our industry, as you know, for many, many years. There are new techniques that we’re looking into with respect to inventory tracking. And where it makes sense to do that, from a monetary standpoint to protect some of our brands, we’re going to do what we need to do to protect the brands. But our business is not geared for big-box stores or Walmart-type stores. So, I would say, 95% or 98% of that is coming through diversion.

Thank you. At this time, I will turn the floor back to management for closing remarks.

That’s great. Thank you, Operator. One last point before we say goodbye, I just want to mention that I will be presenting at the B. Riley Investor Conference, which runs from May 24th to May 25th in Santa Monica, California; two other conferences that are in New York, in June. I will be at the Citi Small and Mid-Cap Conference, which runs from June 8th to June 9th, as well as the Piper Jaffray Consumer Conference, which runs from June 13th to June 14th. We should have more precise dates when we announce our first quarter results in early May. And I hope to see some of you at these events. Once again, thank you for your participation on this call, whether you are live or listening via webcast. And as always, if anyone has additional questions, I am available to take your calls. Thank you, and have a great day.

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