Interparfums, Inc.

Greetings and welcome to Inted Parfum, Inc.'s 2024 Third Quarter Earnings Conference Call and Webcast. At this time, all participants are in a listen-only mode. A -and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. At this time, I'd like to turn the call over to Karen Daly, Vice President at the Equity Group, and Inted Parfum's Investor Relations Representative. Thank you. You may begin.

Thank you, Diego, and good morning, everyone. Joining us on the call today will be Chairman and Chief Executive Officer Jean Madar and Chief Financial Officer Michelle Atwood. On behalf of the company, I would like to note 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 may be found in the company's filings with the Securities and Exchange Commission under the headings Forward-Looking Statements and Risk Factors in its most recent annual report on Form 10-K. Forward-looking statements speak only as of the date on which they are made, and Inted Parfum's undertakes no obligation to update the information discussed. As a reminder, consolidated results reflect the company's two business segments, European-based operations through its 72% owned French subsidiary headquartered in Paris, Inted Parfum's SA, and United States-based operations through its wholly owned subsidiaries headquartered in New York. It's now my pleasure to turn the call over to Mr. Jean Madar. Jean?

Thank you, Karen, and good morning. Good morning, everyone, and thank you for joining us today. Once again, I'm happy to report that the fragrance market remains robust and is continuing to grow, but of course, at a more sustainable pace than in the past two years. The strong market only goes so far. Equally important to our success is our ability to swiftly adapt to changing consumers' preferences, nutrients, as well as the ever-changing challenges of a global business while delivering our products sustainably and efficiently to our retailers and distributors. Historically, our third quarter has been our strongest, owing to the pre-holiday season shipments, and the third quarter of this year did not disappoint. In terms of sales, it was not only the best third quarter, but also the best quarter in our history. Michel, in a couple of minutes, will provide insight into our financial results. So, third quarter sales across all markets were strong. Our three largest markets, North America, Western Europe, and Asia Pacific, grew sales by 12% for North America, 25% for Western Europe, and even 15% for Asia Pacific. Central and South America sales also continued on its positive trajectory with a 20% growth. Sales in Eastern Europe bounced back after being impacted by sourcing constraints earlier in the year, achieving third quarter sales growth of 23%. Also, our travel retail business continues to strengthen slowly but surely. In the first nine months of the year, it has increased 24% from this time last year, representing approximately today 7% of net sales, getting us closer to our target of 10% of annual net sales. Regarding our presence in China, we recognize that we are currently under-penetrated in this market, and we are fortunate to have remained insulated from the huge volatility and challenges that many companies in our industry faced in this region. We have been closely monitoring the region and determined that the timing for entry is not yet right. At this time, we are in the initial stages of developing a strategic promotional program aimed at accelerating growth in the Chinese market, but only in 2026 in a very measured fashion. From a channel perspective, for the first nine months of 2024, direct sales to retailers and travel retail represented approximately 37% of our net sales, up from 35% one year earlier. Direct sales are primarily in the US, in France, and in Italy. While retailers are adopting a linear inventory approach, our product sales have remained strong despite the reduced stock available on store shelves. Since the majority of our net sales are conducted through our global network of distributors, we are as committed to them as ever in terms of point of sales, advertising and promotional support, product development and marketing. With an increase of sales direct to retailers, we are also seeing an uptick in our promotional gift set program. Gift sets are a fundamental offering in the beauty industry and deliver highly desired value for our retailers' customers. While demand is not as high as we have seen across our US consumers, we are seeing growing demand for gift sets across Europe and even in the Middle East. During the summer, we fulfilled initial orders of gift sets and achieved healthy sell-out plus strong reorders in the form. Our retailers are now restarted and well-prepared to serve their customers ahead of the holiday season. Turning to our strategic initiatives, our success reflects the consistent art performance of many of our prestige brands and the resilience of our team members who tirelessly ensure operational excellence throughout our organization. There have been key areas of improvement this year that are in large part driving our results, which include our advertising and promotional programs and fruitful spread of new products. Regarding our advertising and promotional program, we have continued to focus on social media and to a lesser extent legacy programs such as billboard, TV and print media. During the first quarter and throughout the entire year, we increased our content creation by expanding our high caliber campaign across Instagram and TikTok to great success. We are also expanding into user-generated content to encourage purchases through highly engaged social media influencers who hold considerable sway in the world of beauty and fashion and increasingly include male influencers. Women's Wear Daily reported that Amazon did $250 million in men's fragrance sales last year, up 43% from the prior year, while Amazon Women's Fragrance Business grew 34%. The article called out Mont Blanc as one of Amazon's best sellers, while women's fragrance sales have traditionally up past men's, recent trends show that the gap between them is narrowing. At Inter Parfum, the integration of influencers and new digital platforms is becoming a central access of marketing strategies, granting greater proximity with consumers and agility in the face of market changes. We also regularly coordinate with our brands fashion houses resulting in both partners benefiting from the synergies of brand recognition and appreciation. For instance, our latest Oscar de la Renta fragrance called New York eau de parfum was featured at New York Fashion Week and in Vogue magazine. Also noteworthy at the Marie Claire US Fragrance Awards event, our Donna Caron Kashmir collection was selected this year's best fragrance collection and Oscar de la Renta Alibi Pop was chosen as best eau de toilette. Turning to our pipeline of product launches, during the quarter we began distributing new scents for the Moncler called Les Sommet collection in the Middle East which will go full scale in 2025. Also debuting were Oscar de la Renta New York eau de parfum as mentioned earlier and the new flanker for Lanvin's Modern Princess. We also introduced extensions for Guess with Womo Intenso and MCM Diamond, a new look and scent of a backpack pillar. We have also captured lots of media attention with an ultra deluxe limited edition version of MCM award winning fragrance, MCM eau de parfum which is embellished by hand with approximately 1100 Swarovski crystals. Our new DKNY blockbuster fragrance, DKNY 24-7 is doing very well and we are expanding its geographic distribution to new markets as well as fulfilling reorders from initial customers. As we mentioned in our third quarter sales release, the DKNY Donna Caron brand duo is on its way to be our next 100 million brand. We are also continuing the global rollout of Roberto Cavalli, Sweet Ferocious and Lacoste Originals. These two new brands combined sales are expected to add approximately 100 million in incremental sales in year one. We have a good line up of new products launches in the coming year. For our second largest European based brand Mont Blanc, we will welcome a new pillar. Similarly, new pillars will be unveiled for Rochasse and Karl Lagerfeld. We are also going to Mont Blanc Explorer, Jimmy Chuman and Coach for Men and Women fragrance families. The same for our Kate Spade Mont Claire Van Cleef collections. For Lacoste, the original Men and Women and Health Well lines will be expanded. And of course, our own Tencent Luxury Fragrance collection named Solferino Paris will begin limited distribution in the summer of 2025. The collection was designed to compete with niche fragrances by bringing our scale and knowledge of this category and the power of our distribution which would enable us to make this startup a success. Furthermore, since we are not paying the usual royalties to the brand owner because we own the brand, we can put that money to good use in ANP. For our US based operation, we will unveil new pillars across several of our brands including two new scents for Donna Caron and the Cashmere Collection, a blockbuster duo for Abercrombie and Fitch, plus new lines for Roberto Cavalli, Ferragamo and Ungaro. We will also be introducing new extensions for several guest fragrance families and for MCM and enlarging the range of personal care products within each brand such as mist and creams. Boosting our momentum, our Italian subsidiary that has been serving as a distribution hub across all the brands since January continues to perform favorably. Online sales are also trending positively across Europe as we leverage our US based e-commerce experience to capture further sales. We are confident in our product expertise, strong brand relationships and efficient distribution capabilities. Together with a dynamic market, we believe we can achieve our net sales target and set yet another record in 2024. I will now turn the call over to Michel, our CFO, for a detailed financial review.

Thank you Jean and good morning everyone. By all measures, the 2024 third quarter was the best quarter in our history as laid out by Jean. I'll drill down the P&L for some also of the highlights. On a consolidated basis, gross margin was unchanged from last year's third quarter at 63.9%. We did see some movements within the two segments, but these were primarily driven by brand and channel mix. On a year to date basis, consolidated gross sales expanded 30 basis points to .6% and we expect full year 2024 gross margins to be slightly ahead of 2023 at approximately 64%. On the ANP side, ANP expended to $1.3 percent. The next year, net sales for the third quarter and the first nine months of 2024 respectively. We are really seeing the results of our investments and our top line achievements and acutely supporting sustainable growth for the future. We continue to work towards our target ANP expense of 21% of net sales for 2024 with significant spending plan for the fourth quarter of 2024 to ensure a successful holiday season and strong start to 2025 similar to what we have done every year. Also included in SG&A expenses, royalty expenses approximated 8% of net sales for both the current quarter and year to date and this is broadly in line with our historical rates. Once again, the amortization of the cost of the Lacoste license which amounted to $4.8 million during the first nine months of 2024 or 1.6 million quarterly will continue over the 15-year life of the contract. Overall as G&A expenses increased 12% and 16% for the third quarter and the first nine months of 2024 representing .9% and .8% of net sales respectively. In the same period as last year, as G&A expenses were .2% and .8% of net sales respectively. Our third quarter operating margin was 25% compared to .7% in the same period last year. Year to date our operating margin sitting at a very healthy .9% compared to a very high base of .5% for the first nine months of 2023. As we reported yesterday, our net income was impacted by foreign exchange losses of 3.3 million in the third quarter as opposed to as compared to 0.7 million gains in the prior year leading to a year over year swing of about $4 million. From a cash flow perspective accounts receivables are up 41% from a year end 2023 but the balance is reasonable based on record quarterly sales levels and the seasonality of our business. These sales outstanding was 83 days up from 72 days from three months ago but this is largely driven by channel and geographic mix as we reach more retailers and specialty stores directly. It is important to highlight that while our accounts receivable have increased, it has not really outpaced sell-in and we continue to experience very strong collective activity with very little risk on AR. Our weekly reviews indicate that our receivables remain in good standing and we do not anticipate any issues with account receivable collections. Our inventory levels at the end of 2024 third quarter increased 9% from the year end 2023. The inventory buildup is designed to support and protect our service levels and the inclusion of our newest licenses Lacoste and Roberto Cavalli. We are actively working on programs to deliver more inventory efficiency and in that regard the conversion of raw materials into finished goods resulted in finished goods making up 63% of our inventory levels at the end of September as compared to 58% only one year earlier. Our efforts to convert more profit to free cash flow by reducing our inventories are beginning to bear fruit with a significant year over year improvement in net cash provided by operating activities which totaled 76 million compared to 18 million in the prior year third quarter. We closed the quarter with a healthy balance sheet with working capital of 617 million including 157 million in cash equivalent and short-term investments. Our long-term debt including current maturities was 179 million at the end of the third quarter. To reiterate we are reaffirming our 2024 guidance of net sales of 1.45 billion implying upper single digits growth in the fourth quarter of this year. This results in earnings per diluted share of $5.15 which will set a new record for our company. Adintra Perfume mastering regulatory environmental and digital issues has been and will be key to remaining competitive. Thanks to our innovation approach, targeted premiumization and ability to offer unique experiences, Intra Perfume is well positioned to meet the challenges of tomorrow ensuring sustainable growth and strong differentiation in our globalized market. With that operator please open the lines for questions.

Thank you. We will now conduct our Q&A session. If you would like to ask a question please press star 1 on your telephone keypad. A confirmation tonally indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment it may be necessary to pick up your handset before pressing the star queues. One moment please while we poll for questions. Our first question comes from Ashley Helgens with Jefferies. Please state your question.

Hi, this is Sydney on for Ashley. Thank you for taking our question. Can you talk a little bit more about the changes in consumer preferences you called out? Sounds like maybe there's a bit of a trend of the gap closing between men's and women's fragrance but curious if there's any more trends you would highlight. Thank you.

I can try to answer this. Yes, we see definitely some trends quarter after quarter, month after month. The men's part of the business is getting stronger. We see also no resistance to price elasticity. We even see that there is a trend to premiumization on the fragrance. More and more people are willing to pay more for fragrance. We are even talking about younger people that are willing to pay more. That's why there is such a growth in the collections, the niche, things that are less commercial, has more signature, the distribution is more selective. This is the new trend. On the other hand, the classic business, the commercial business, the designer fragrance business that we have with our brands could be Coach or Guess or Mont Blanc. It's still doing quite well. This is for me the important trends that I can identify.

Thank you.

Our next question comes from Corrin Wolfmeyer with Piper Sandler. Please state your question.

Hi, this is Sarah for Corrin. Thanks for taking our question. I just have one on selling trends. What are those expectations for Q4? What are you seeing with retail order patterns for both the US and internationally? How far off is selling versus sellout right now?

In terms of sell-in, I think as we laid out in our prepared remarks, we are projecting double-digit growth in the fourth quarter. At this point in time, what we have seen in the first nine months is sell-in, this is not only true for us but what we are seeing is also for our competitors, sell-in has been slower than sellout. What we are seeing is restocking continuing to happen across the industry. There is still a small disconnect between sell-in and sellout and it's been about a point and it really varies from geography to another. At this point in time, that's kind of what we are projecting for the fourth quarter. Our retailers are well stocked and so far the holiday season is going pretty well.

Great, thank you, very helpful.

Our next question comes from Hamid Korsend with BWS Financial. Please state your question.

Hi, a follow-up on this last question is I'm just trying to get a handle on the sequential decline figure. Based on the current guidance, it's a 15% sequential decline in sales and IPAR has never had that kind of degree of decline going into Q4 from Q3. I just want to see if there is anything special there.

Michel, continue.

I think at the end of the day, sequential declines are very, this is a highly cyclical and seasonal business. Year over year, there can be various impacts. There can be large launches. You can have new brands. If you link about, for example, 2021, we added the Ferragamo brand in the middle of the year. At the end of the day, it's always very difficult to look at these things on a sequencing basis. Our growth rates are projected to be, you know, for the fourth quarter in line with what we've delivered on a -to-date basis, which is about 10%. Do recall last year, we did have a very, very elevated -to-date at the end of the third quarter where we were up 27%. Overall, we are starting to lapse some of the high growth periods that we had last year. That's one of the reasons why you're seeing more normalized growth this year and also going forward.

Okay. If I may, what is the benefit or impact of selling more gift sets versus the traditional individual?

I think that the customer is looking for the gift sets. These are value offers. This is some gifts. Again, we can afford it. This is a practice. You will see people going to department stores and really looking for this set. For the people who don't know what it is, it's basically the same product, but we are giving away on the top of a regular size a body lotion or a smaller size. I think it's a way to keep our customers happy. It's also to thank them for being close to the brand. For us, of course, it has a little impact on the margin, but we are able to manage it. It was very, very important in the US for years. It's becoming more important in Europe. We see trends that this is going to be important almost everywhere. We will continue to manage it. We don't want, of course, this business to be too big, but in the first quarter, it's quite normal to have gift sets.

I was just going to build on Jean, which is every business has some level of promotionality. You can either promote based on price or you can promote through these kinds of mechanisms. These mechanisms tend to be a lot healthier in terms of long-term and preserving the long-term value of your products in the market. At the end of the day, it's a much more effective and luxury supporting promotional mechanism.

Is there an update on the luxury line for release in 2025?

I think the plan is to launch in the summer of next year. That is the current plan. Thank you. I do want to insist that this is still really going to be very small. Obviously, this is a very important strategic play for us to enter this space. These brands take time to be built up. This is not going to represent a significant building block for next year.

Thank you. Our next question comes from Oliver Chen with TD Cowan. Please state your question.

Hi, John Madar and Michelle. The fragrance market in terms of somewhat moderating, when do you expect that to abate as we continue to be in this normalization phase or catalyst for it to perhaps reaccelerate in the future? Also, it's nice that you're driving higher demand across Europe and Middle East sell-in relative to the US. What's driving that and helping us compare and contrast these markets could be useful for us as well. China's also been a tough market. I know you spoke about promos and tactics, but what do you see for China? Some of the overhang macroeconomically could be structural and multi-year in nature. I would love your thoughts on how to compete in that market as well. Thank you.

Thank you. Michelle, you want to answer the first part? I will answer the second.

Hi, Oliver. We continue to see pretty healthy demand across the market. The markets are growing. We continue to see double-digit growth across the market. This is what the NPD data is telling us, but when we look at our competitors and when we look at overall what's happening from a sell-in standpoint, there seems to be a bit of a disconnect there. Again, I think this is in part driven by some of the adjustments that are being done within the inventory levels of the stock and trade levels. We keep thinking that the market is going to slow down, and I think that is always reflected in our guidance. I think we've all been happily surprised quarter after quarter that the market hasn't slowed down. I think a lot of the trends continue to be good, particularly I would say in the US, where we are seeing an increase in penetration, very strong increase in penetration and usage. I think that has been really fueling the market.

Okay, Michelle, I'm de-stalking.

I'm sorry. If I may, I would like to add that we have seen double-digit growth. We have grown at a rate of 10% in the first nine months of the year, but we think that with a stronger sell-out than selling, we anticipate this growth going forward to slow down. I don't think we are going to see the same type of growth that we had in the last two to three years, which is fine. Before COVID, this industry, a fragment of industry, was growing at a 2% rate. We'll do better than that for sure, but when you see our peers and when you see the market, I think we have to be prudent on the growth. So, the good news is we have brands in our portfolio that are at the beginning of their life cycle. Lacoste is not even one year old under our management, and we have a lot to do with our new business brand. Roberto Cavalli is also new in the portfolio, and we have a blockbuster launching in 2025. So, because of the activity and because of the portfolio, we think we will continue to lead our peers, but I want everybody to be reasonable and do not expect in the future what we have done in the past, for sure.

Very helpful. Michelle, on your destocking comments, when might that end? We are definitely seeing that across the industry as well. And then John Madar, as we look to next year, which product launches are most material? Are you most excited about if you had to prioritize a few? Thanks a lot.

Yeah, so Oliver, I think the destocking has been slowing down. It was much stronger at the beginning of the year, and it has been slowing down. I think overall in the third quarter, it was broadly in line with our historical sellout growth. So, I think at this point in time, I think we're feeling that the destocking is behind us.

So, regarding the brands, we have some very interesting new launches next year. Let's mention G2, let's mention Lacoste, let's mention of course, Roberto Cavalli, Ferragamo, and Guest has also very interesting programs for So, almost all our largest brands have new pillars or new blockbusters. So, we are quite confident.

Thank you very much. Best regards. Happy holidays as well. Thank you. Keep it up with the great gift sets. Bye.

Thank you,

Oliver. Thank you. And we have reached the end of our question and answer session. I'll now turn the call over to Michelle at Wood for closing remarks.

All right. Well, thank you again for joining our call today. Before I end the call, I would like to announce a few upcoming events. We'll be providing initial guidance for 2025 next Tuesday, November 12th at the close of the market. On December 5th, D.A. Davidson will be visiting our New York headquarters as part of its seventh annual Holiday Beauty and Wellness Bus Tour. And on December 9th and 10th, I'll be participating in the Raymond James Consumer Conference here in New York City. So, if you are interested in attending any of these events, please reach out to their respective sales representative. I also want to take this opportunity as we get into the end of the year to really thank our teams and our organization. Clearly, these results are very strong. We wouldn't achieve a record year without the help and support of our entire organization. So, I really wanted to tip my hat again to the team. We don't get these results without a lot of hard work and dedication. So, this is really a big nod to the organization, to the IP organization for all their hard work and support this year. If you have any additional questions, please contact Karen Daly from the equity group. She's our investor relations representative and her telephone number and email address can be found at our most recent earnings release. So, we look forward to the next conference call and thank you and have a great day.

Thank you. All parties may not disconnect. Have a good day.