Q2 2009 Elizabeth Arden Earnings Conference Call - Final.(Broadcast transcript)

OPERATOR: Greetings. Welcome to the Elizabeth Arden second quarter fiscal 2009 results conference call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Ms. Allison Malkin of Integrated Corporate Relations. Thank you, you may begin.

ALLISON MALKIN, IR, ELIZABETH ARDEN: Thank you, good morning. Thank you for joining us. Before we begin, if you not received a copy of Elizabeth Arden's press release, please call 203-682-8200 and we will send one out to you immediately. Also, please note that this call is being broadcast live over the Internet and you can access the call at www.elizabetharden.com. Before we begin, I'd like to remind you that some of the comments made on this call as either prepared remarks or in response to your questions may contain forward-looking statements that are made pursuant to the Safe Harbor Provisions of the Securities Litigation Reform Act of 1995. Such information is subject to risks and uncertainties that could cause actual results to differ materially from the statements as described in the press release and in Elizabeth Arden's most recent annual report on Form 10-K filed with the SEC. We direct all listeners to that report.

Also, some of the information that may be contained in our earnings releases or comments made on this or other calls may constitute non-GAAP financial information under the SEC's regulation G. Reconciliations of such information to the most comparable financial measure prepared in accordance with generally accepted accounting principles may be found on our website at www.elizabetharden.com. The information contained in this call is accurate only as of the date discussed and investors should not assume that the statements made in this call remain operative at a later time. Finally, Elizabeth Arden undertakes no obligation to update any information discussed on this call. I would now like to turn the call over to Scott Beattie, Chairman and CEO of Elizabeth Arden. Scott, please go ahead.

SCOTT BEATTIE, CHAIRMAN, CEO, ELIZABETH ARDEN: Thank you, Operator, and welcome everyone to our Q2 conference call. With me today is Joel Ronkin, our Executive Vice President of North American Fragrance Unit, Steve Smith, our Executive Vice President and CFO, and Marcey Becker, Senior Vice President of Finance. I would like to first outline the agenda for today's call. First of all, I'll provide an overview of our corporate performance for the second quarter. In addition, I'll review the specific performance of the international business unit which represents 32% of our revenues, and the Elizabeth Arden prestige department store business unit which represents 3.5% of our total business. I will also provide a summary of our key corporate initiatives and priorities for the remainder of fiscal '09 and 2010.

Joel will provide a review of our north American fragrance business unit performance which represents 65% of our total business. This business unit includes our department store and mass fragrance businesses in the United States as well as our Canadian and Puerto Rican business. Joel will discuss this key initiatives of this business unit, including fragrance brand performance. Steve will provide a detail reviewed of our key financial metrics and review our financial guidance. Hopefully this structure combined with the segmented reporting that we have on our 10-Q will provide more clarity into our quarterly operating performance for investors. But, first of all, I will talk about a summary of our Q2 performance.

Elizabeth Arden global brand performance -- or, excuse me, our Elizabeth Arden department store performance in the United States was much below what our expected performance levels were. Our skin care and color categories perform consistent with category which was approximately 8% to 9% decline, but our fragrance business was much worse and the primary reasons for that were, one, that retailers were sold our seasonal gift sets which have return privileges and have very strong value proposition for customers. Unfortunately, most of our department store customers did not replenish significant amounts of basic stock which is much higher margin business for us. So, as a result, we had committed to a seasonal spend to support our business in that channel of distribution and we were negatively impacted by the deleveraging of our cost structure and the fact that the basic stock replenishment was so poor in that channel of distribution.

In addition, we had no new fragrance launch during the Christmas season for the Elizabeth Arden brand. Instead, we had planned a fragrance launch, which is named Pretty, for this spring and that will help us during the third and fourth quarters of this year. In terms of our international business, our net sales were down 13.8% but X currency we are down 3.7%. The primary driver of that decline was our travel, retail and distributor business which was down 33%. As investors will recall, this is not only a growing -- traditionally been a growing component of our business but been a very profitable contributor for EBITDA both for our international business unit as well as our overall business.

What happened in travel, retail and the distributor market were a couple of factors. One, there was a tremendous inventory destocking that occurred throughout our travel retail business as traffic internationally declined as a result of consumer confidence declines and overall economic weakness. We also experienced for the first time both credit and currency issues for many of our distributors, particularly in merging markets. They are also being impacted by the world credit crisis and the weak -- their weak currency and the volatility or the rapid strengthening of the US dollar during the fall created a lot of pressure on their ability to acquire additional volumes for the Christmas season and their profitability when, in fact, we billed them in US dollars. This also is a very profitable component of our international business.

The rest of the international business performed reasonably well and for the first half our total international business was down 7.7%, X currency down just 1.6%. This unit had minimal contribution from the Liz Claiborne acquisition and will benefit during the third and fourth quarter as we start to roll out the Juicy Couture brand and some other launches throughout our international platform. As a result of the general weakness of our business during the second quarter and the additional Liz Claiborne inventory that we acquired not only in June but the commitments we acquired through their supply chain for the fall season we carried excess inventory at the end of December.

At the end of December inventory levels were $390 million versus last year $340 million. All of this excess inventory is, in fact, excess fragrance inventory that is in the process of being reprogrammed into retail. We have a very active program of reducing receipts of inventory over the next six months as well as reprogramming both promotional and basic stock inventory into the existing retail channels. This inventory level combined -- this program combined with dramatically reducing receipts of new inventory will substantially reduce our inventory levels from now until June. This leads me into a discussion of our key corporate initiatives. Our first …