Interparfums, Inc.

Greetings and welcome to the Interparfums second quarter 2022 conference call and webcast. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If you'd like to ask a question, press star 1 on your telephone keypad. If anyone should require operator assistance during this conference, press star 0 on your telephone keypad. Please note that this conference is being recorded. Also, 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 Interparfums' annual report on Form 10-K for the year ended December 31, 2021. and other reports Interparfum files from time to time with the Securities and Exchange Commission. Interparfum does not intend to and undertakes no duty to update the information discussed. I will now turn the call over to Jean Madard, Chairman and CEO of Interparfum. Mr. Madard, you may begin.

Good morning, everyone, and thank you for participating in today's call. In the past, our CFO, Russ Greenberg, started the ball rolling, but today I will take the lead because this is Russ' final conference call for Interparfums. And on behalf of our entire staff and our board of directors, I want to say thank you to Russ for 30 years of loyal and dedicated service. As you know, it has been announced that Russ will be retiring next month. He has earned and well deserves to devote more time to his family and the activities he most enjoys. As we announced in June, Michel Atwood will officially take over the CFO reins on September 6. Michel and Interparfums are not strangers. We have worked with him in various capacities at various companies in the past. He was most recently at Estée Lauder, as Vice President Finance and Strategy, providing strategy and oversight for the fragrance category, where he led a team of finance professionals across the globe as a key member of ELC Senior Finance Leadership Team. Michel also spent more than 20 years at Procter & Gamble, where his final title was Divisional CFO of Global Prestige Fragrance, leading a team of 90 people and ultimately, spearheading the divestiture of that division to Coty. Also, we have included Michel in our proxy material to fill the board, a seat Ross is vacating at our annual meeting of shareholders on September 9, 2022. So again, thank you, Ross, for all this time with us. For anyone new to Interparfums, keep in mind that when we refer to our European-based operations, We are talking about our 73% owned French subsidiary called Interparfums SA, while our US-based operations refer to our only owned domestic subsidiaries. In both sides of the Atlantic, our business is primarily prestige, fragrance, and related products. First, I want to address our 2022 guidance, which we raised last month to approximately $1 billion in net sales and diluted EPS of $3.25. If you know Interparfums for any length of time, you know that we are traditionally cautious. While we are halfway through the third quarter, historically our strongest quarter, and business is solid, our visibility is clouded by the unpredictability of international turmoil. Eastern Europe, China and Taiwan are among the most newsworthy today. But tomorrow, who knows where the crisis will be. While we try to factor into our guidance the implications of regional resurgence in COVID-19 and currency fluctuations, forecasting is imperfect and we prefer to adjust guidance after we book the orders. Moving on. The fragrance industry has been on an upward trajectory around the world and so has our business. Year-to-date, North America, our largest market, achieved sales growth of 8% despite the IT problems by our US distribution subsidiary for European-based products and the strength of the dollar. compared to the Euro. For the first half, Western Europe and Asia Pacific, our second and third largest markets, grew sales by 40 and 39% respectively. Our sales in the Middle East increased by 31% and in Central and South America, sales rose 35%. Understandably, our sales in Eastern Europe declined thus far this year by 14%. Fortunately, who are continuing to see a renaissance in travel retail. I do a great deal of travel, and what I see are packed flies and eager shoppers at duty-free and in-flight stores. Fragrances launched in the first quarter continue to roll out in the second, notably Kate Spade Sparkle, Mont Blanc Legend Red, Coach Wild Rose, and Guess Wombo. Incremental sales of Ferragamo, Ungaro and MCM products also factored into our top-line growth. And we have been enjoying a big success with our debut duo for Moncler. In our sales release last month, we talked about how the strength of the dollar masked our progress for European-based products in the second quarter. Six-month figures are just as confounding. Take our three largest brands. Montblanc's first half sales were 25% ahead of last year in euro, but only 14% in dollars. Jimmy Choo's first half sales rose 16% in euro and under 6% in dollars. Coach sales were up 29% in euro, but just 17% in dollars. Our fourth largest brand, Guess, experienced first half sales Sales growth of 37%. With the EFFECT collection last year and WOMO this year, guest fragrance and grooming products have captured market share among men. Some good things are happening with our midsize brands too. Take Abercrombie & Fitch. First half sales are 50% ahead of last year with a large infusion of sales coming from Europe. Still a very small part of our business, travel amenities are starting to percolate. We are looking to double those sales this year. The Atlantis in Dubai, which may be the most deluxe hotel I've ever encountered, recently has selected Graf as its travel amenities partner. Ferragamo accessories can be found in many hotels, such as Longano and Kempinski, and just opened Turkish Airlines. Lanvin continues to be a supplier of the Sofitel chain. We are very pleased to welcome Donna Karan and DKNY to our portfolio. We have assembled a team of real pros for these brands and acquired inventory from the former licensee who will also be producing legacy scents for us through year-end. So we are fully prepared to build upon the appeal of these names. We have many new product launches in the pipeline for the coming year, but I could describe most of them as brand extensions rather than new pillars. Fortunately, we do not need major launches for our business to continue to grow. Some of our best sellers have been around for years, even decades. We have also decided to hold off on major product launches for Ferragamo, Donacaran, DKNY and Ungaro until 2024 rather than next year. But new flankers and extensions are in the works for all of them. We will be able to disclose more about our 2023 plans on our next conference call. And yes, we are still on the lookout for new names. We have two types of targets, those with established businesses and fragments often for aspirational brands with great potential. We are now on the A-list of fragrance partners for brands that fit one of those profiles. However, there is no shortage of eager competitors. Interparfums is on the cusp of an anticipated growth surge. I sometimes feel like the CEO of a 40-year-old startup. To prepare for this expected growth, we see ahead. We have taken on more space at our New York City headquarters. and of course we are established in Florence, Paris and Geneva. Our New Jersey distribution warehouse is undergoing refurbishment and also our inventory management and enterprise resource planning ERP systems overall. The ERP implementation is moving forward and we are getting closer to the finish line. It is an ambitious move encompassing a cloud-based system using third-party programs to assist in inventory and warehouse management, scanning systems, and related functions. We expect the transition to fully complete by year-end. On a somewhat related topic, you may have seen the July 10 issue of the Wall Street Journal in which I was quoted about our move away from sourcing in China for our U.S. operations. One of the lessons learned in the aftermath of COVID was that even though made-in-China components are cheaper, getting them where they were needed became an impossible task. We decided that shifting operations back to the U.S. from China and, for that matter, other countries where in the past cheap labor and access to factory capacity outweighed cost of shipping products across the ocean. Even now that Shanghai has reopened and shipping rates have come down, we are still reducing our dependence on China because the logistics is far too often impossible. We have engaged US suppliers and nearly 70% of the parts are being produced by US companies. Our plan is to have nearly all filling and assembly operations in the US and in Europe by 2024, and that is company-wide. While China is becoming less important to us as a supplier, it is becoming increasingly important as a market. Chinese shoppers are big spenders and fine fragrance market penetration has been growing, but it is still in its infancy. We have stepped up our advertising, engaged key opinion leaders, celebrities of all sorts, including up-and-coming K-pop groups which are extraordinarily popular in China. Lanvin, Ferragamo and of course Anasui occupy much of that effort. We are learning to adapt to inflation where moderate and regular price increases are becoming the norm. That means becoming more proficient at projecting costs and adapting our pricing two years into the future. At the start of 2022, we raised prices on average 5%, and another price increase of between 3% and 6%, depending upon the region, is coming this fall. Now, I will turn the call over to Russ for some of the financial review.

Good morning, everyone, and thank you, Jean, for your kind words. Over the past three decades, I have been part of a winning team that has made Interparfum a rapidly growing, highly respected global fragrance enterprise. I know that I am leaving the company in excellent hands. Let's move on to business. Foreign currency exchange rates have had a significant impact on our 2022 reported results. The US dollar relative to the euro hasn't been this strong for about five years. And as you must know by now, a strong US dollar has a negative impact on our sales. However, a strong dollar increases gross margin because almost 50% of net sales of our European operations are denominated in US dollars, while almost all of its costs are incurred in euro. For European-based operations, overall gross profit margin was about the same, just under 70% in the second quarter of both 2022 and 2021. The gross margin benefit from currency fluctuation and price increases was offset by increased transportation and component costs. In addition, our U.S. sales of European-based products were hampered in the early part of the second quarter by shipping related issues following a change in the distribution software by our logistics partner. I will also remind you that we generate higher margins for sales by our own distribution subsidiaries versus gross margins that are generated on sales to unaffiliated distributors. For United States operations, gross profit margin was 100 basis points ahead of the second quarter of 2021, with the improvement due to the 69% increase in net sales, which enabled us to better absorb fixed costs such as depreciation and point-of-sale expenses. On a consolidated basis, SG&A expense for the second quarter rose 24% and represented 44% of net sales, while in last year's second quarter, they were 42% of net sales. For European operations, SG&A expenses represented 47 and 44% of net sales in 2022 and 2021 second quarters, respectively. For U.S. operations, SG&A expenses represented 38 and 36% of second quarter net sales, in the 2022 and 2021 periods, respectively. You will recall that throughout 2021, net sales blasted through expectations, and we tried to play catch up on advertising and promotion. As we have been reporting, we are spending more than last year on A&P, both in dollars and as a percentage of net sales. Thus far this year, we've invested slightly more than $80 million or nearly 16% of net sales on A&P as compared to $55 million or 14% of net sales at mid-year 2021. Based upon our $1 billion sales guidance, you can expect another $120 million of such expenditures to meet our A&P target of 21% of net sales. Once again, usually the fourth quarter is when we activate the big A&P spend to both drive holiday sales and to keep the momentum going in the first quarter of the following year. Just a point that we made in the first conference call that still applies. While second quarter A&P expenditures were up 38% and represented 19% of net sales, This is still below pre-pandemic levels. In both the second quarters of 2019 and 2018, promotion and advertising represented 22% of net sales. Our second quarter operating margin last year was an exceptional 21.5%, and this year it came in at 18.6%. Going back to pre-pandemic levels, our 2019 second quarter operating margin was 13 and a half, and in 2018 it was 12.6%. Our consolidated effective tax rate was 24% for the first half of 2022, and that compares to 30% for the same period last year. You may recall that in 2021, our tax bill included a settlement with the French tax authorities, which along with a higher French corporate tax rate accounted for the 20% decline in our overall tax rate. From a cash flow perspective, mid-year inventory levels increased 41% to $266 million from 2021 year end. We closed the quarter with working capital of $445 million, including approximately $196 million in cash, cash equivalents, and short-term investments. And our working capital ratio was 2.9 to 1. The $117 million of long-term debt relates primarily to the acquisition of the new headquarters for Interperform SA, which today is fully operational and absolutely fabulous. Now, operator, please open the line for questions.