Greetings, and welcome to the Inter Parfums Second Quarter 2021 Conference Call and Webcast. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Russell Greenberg, Executive Vice President and Chief Financial Officer of Inter Parfums. Mr. Greenberg, you may begin.

Thank you very much, operator. Good morning, and welcome to our 2021 midyear conference call. As always, 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 for the year ended December 31, 2020, and other 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. 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 sales of Prestige Fragrance products conducted through our wholly-owned domestic subsidiaries. Of note, the average dollar-euro exchange rate for the 2021 second quarter was 1.2 compared to 1.1 and 1.12 in the second quarters of 2020 and 2019, respectively. As you know, a weak dollar versus the euro has a favorable impact on our net sales, while gross margins are negatively affected, and that is because more than 50% of net sales of our European operations are actually denominated in U.S. dollars, while almost all of their costs are incurred in euro. I also don't have to remind listeners that last year's second quarter, much of the world closed down due to the treacherous days of the COVID-19 pandemic. Our sales nearly ground to a halt, and we recorded the first ever quarterly loss in our 33 years as a public company. What a difference a year makes. When we announced initial…

Thank you, Russ, and good morning, everyone. Our message today can be summed up in 3 sentences. Business is booming. Demand is very strong. And virtually all our brands are outperforming what we budgeted at the beginning of the year. So let me move into details. Through the first half of 2021, sales in our largest market, North America, rose 59% as compared to 2019. That is huge. Sales in Western Europe and Asia were relatively flat with the first half 2019, and that's pretty good. Sales in 2 of our smaller markets, Eastern Europe and Central and South America, were ahead, 54% and 10%, respectively, over the first half of 2019, while sales in the Middle East declined 23%. Our 4 largest brands are running ahead of 2019 as Montblanc, Jimmy Choo, Coach and GUESS rose 3% for Montblanc, 39% for Jimmy Choo, 34% for Coach and 58% for GUESS compared to the first half of 2019. You may recall that we launched Explorer for Montblanc in 2019, and hence, the less dramatic comparison. Although international travel is slowly resuming, the impact on our travel retail duty free business is barely noticeable. Pre-pandemic, this business historically represented around 15% of our net sales. That said, online sales have been quite good. Just a reminder, we do not directly conduct e-commerce with consumers, but our products are sold across multiple Internet platforms. Our products are sold through the websites of department stores and specialty stores, mega online sites like Tmall and Amazon and the websites of our licensors. On the related subject, Origines-parfums, in which we acquired a minority interest effective July 2020, has been doing quite well with strong sales growth. But because it's a minority interest, itself are not consolidated. Of course, the big news over the last…

[Operator Instructions] Our first question comes from Linda Bolton-Weiser with D.A. Davidson.

So I was just curious about, Russ, your comments on gross margin. I mean you compared it to the second quarter of '19. But actually, if you look at it just like compared to the first quarter of '21, it actually went up sequentially. So I'm just curious why that is because the euro comparison is actually unfavorable in the second quarter. So why was the gross margin even higher in the second quarter than the first quarter? Can you just give a little more color on that?

Certainly, Linda. A lot of it -- it was actually up for both the 3- and the 6-month period. And much of that is due to the increase in the sales and us being able to leverage some of the fixed costs that are included in the gross margin. As you know, certain depreciation of tools and molds, especially here in the United States, that's more of a fixed expense that is included in the gross margin so that when sales are higher, you're better able to leverage those types of expenses. In addition, and this goes more for the European operations, the number and percentage of gift sets that are sold during the course of the quarter in 2021, whereas a percentage of total sales, were much less than that of 2020. And that also attributed to the increase in the sales in the gross margin during that period.

Okay. And then can you just give a little bit more color on the Ferragamo license, like maybe the long-term potential of that brand? I mean I know it has existing sales. Can you give us a size perhaps of the annual revenue currently? And then how do you see it sizing up versus some of your other franchises?

Yes. Russ, do you want to try to answer?

Yes. The Ferragamo fragrance business was in the high double digits for many, many years. And Ferragamo was publicly traded, so a lot of this information is really available online and you can see it for yourselves. We really have not gone out and publicly disclosed their numbers, and I really don't want to. But needless to say, the fragrance sales as a result of the COVID-19 pandemic were impacted severely during the course of the last year to 2 years. So our goal is really to be able to reinvigorate and bring back Ferragamo to its -- the levels that it has seen for the last 10, 15 years. And that's really where the goal is. I don't really want to enumerate and put specific dollar figures out there, but there's probably enough information in the public domain that you could probably research and find it for yourself. Jean, do you agree on that?

Yes, the information is public, so I'm not very sure going [ph] -- but -- so we know Ferragamo for a while. The fragrance were run internally by their fashion house. But we met again during the pandemic and Ferragamo management decided to really look at our proposal of licensing because it was difficult for them to fight alone in this environment. So by joining our portfolio, Ferragamo is much stronger. Ferragamo will benefit from the strength of our brands, from other brands, from the strength of our distribution. We have big plans for Ferragamo. There is an existing business that is absolutely fine. And the idea will be to launch a new product in 2023, with all the strong elements of the brand. The brand is known, we don't have any issues with perception of the brand. We just need to reestablish them as the top luxury fragrance in the market. we think it's totally achievable, and we give ourselves 2 to 3 years to be back in -- at the level that they were pre-COVID.

Okay. And then, can I just -- yes. Can I just -- yes, you mentioned cost inflation that it's kind of changing and becoming a little bit more so in the third quarter. Are you including in your guidance specifically any margin pressure from increased costs? Or are you hoping to offset? Or what is exactly included in your guidance?

Yes. That's a...

In the guidance we have -- I'm sorry. In the guidance we have, of course, we look at our cost. And that's true that certain part of our cost of goods are going up. Like Russ mentioned, the freight worldwide is going up. So our freighting is up. So our cost of bringing components and moving components worldwide is up. But we have also a major challenge on the supply. So we have to accept certain price increase. All this is already taken into account in our new -- for China in our new guidance. Russ?

Yes, that's exactly what I was going to say. When we issued the -- and revised our guidance most recently, when we announced sales back, I think it was the 19th, this new guidance definitely includes the effects of some of the supply chain issues that we are seeing. The sales were prepared on a relatively conservative basis to take that into consideration. From a margin standpoint, we've absolutely incorporated some of the additional transportation costs that we have seen. That was -- that's really the biggest inflation area that we're faced with at the current time. Transportation costs are up, in some cases, 200% to 300%. So moving components from country to country, we are taking a deep dive and looking at what we can do in order to get around some of those increases. But as far as the numbers that we've projected for the remainder of the year, we've definitely taken into consideration the lion's share of the potential effects.

Our next question comes from Steph Wissink with Jefferies.

I also have a few questions, if I could. Russ, this one is for you on marketing. I was wondering if you can help us think through the cadence in the second semester. Is there a weighting by quarter, Q3, Q4? Or how do you want us to kind of model on A&P for the back half?

Yes. Certainly, based upon what we see is from the sales trends, Q3 and Q4 from a sales standpoint will probably be relatively closer together than they have in the past. But from an advertising standpoint, our advertising expenditures are always much more concentrated in Q4 than in Q3. In addition, we have an initial, call it, a small exclusive prelaunch for Moncler coming up in the fourth quarter. And in anticipation of the 2022 launch for Moncler, we know that we've already allocated certain dollars of marketing spend that we're probably going to put into the marketplace in Q4 in -- to kind of advance and in anticipation of the 2022 launch of the new Moncler fragrance. So I would definitely say that things are going to be much more concentrated in Q4 than Q3.

All right. Very helpful. And then my second question is just in relation to Linda's question on cost. Do you have any plans to raise price? And if you do, what's the process to raise like-for-like price on your product in the market already? Do you have to give retailers notice? How quickly can you implement? What should we be thinking about for pricing?

Yes, we have not raised prices for more than 3 years, but we have decided to increase prices. We gave notice to most of our customers on August 1, so this was not a long time ago, that we will have a certain price increase on January 1. Reception was quite accepted because we don't do this often. And it seems that all our competitors are doing it. So we didn't see any issues with that. Price increase that we are talking about is anywhere from 2% to 4%.

Very helpful. And my last one, and maybe, Jean, this is for you, is just bigger picture, thinking about how consumers are engaging in the category. It's just really been so impressive year-to-date. Has there been any change by channel or by specific distribution point where you're seeing consumer behavior coming back out of the backside of COVID, maybe turning up a little bit differently in different destinations than you would have expected?

Not really, I don't see any changes. The online business continue to be strong. The department stores and the specialty and perfumery business is also good. It's -- the business is good, really on all the channels. Well -- but what we see is quite impressive because we are receiving orders today that we cannot fulfill because they are way, way above our forecast. So we see the stores only the quantity that they can sell in the next month or 2. Nobody -- definitely, nobody has a lot of inventory. Actually, some stores are complaining because they would like to have more inventory. We are in a very good position. The inventories at stores is moving very, very fast. We are shipping on a daily basis. Some store, weekly basis. Some stores, the products move very fast. We have not seen this for a long time. I don't remember in the last 5 years I have seen such a strong demand for -- across our brands.

Our next question comes from Hamed Khorsand with BWS Financial.

Just on the comment you just made about inventory. Is it -- do you think that you're picking up share, or is the entire pie actually expanding faster than you think?

So in certain markets, in the U.S., we are definitely picking up shares because we were one of the first ones to ship again. We were one of the first one to respond again in marketing and advertising. So definitely, we are taking market share. In Europe, it's a little bit different. It's a little bit slower because some markets are not fully open as we speak. So it's on and off. But in the U.S. and in China, we are definitely taking market share.

And what do you assess as far as the duty-free stores comprising of your revenue right now? Are they back to normal for you?

No, no, no. We are very, very, very far from normal, very far. As I said in my comments, it used to present close to 15% of our business. We are still very, very far. We've seen some strong business in China with, of course, Hainan. Also, we are seeing some strong business in Korea Duty Free, we have some Chinese travelers. So Korea Duty Free, China Duty free is outperforming. But overall, we are way, way below our normal percentage of sales in travel retail.

And my final question was, how do you describe or assess your '22 product launch plans? Is it going to be as robust as it was this year?

We have a mix of very important launches, what we call the blockbuster launches. And, of course, a flanker to keep the line running. So we have a great mix going forward. The market is really looking at all of our programs and there we're standing quite positively. So all our -- the problem today is more manufacturing and making sure to have more inventory in order to supply all the demand. But this demand was not forecasted. That's why we raised already twice our guidance. As you know, the company is quite conservative when we give guidance. So we'll wait a little bit more, I will say, another month or 2 before we review again. But the challenge is we have the orders, we have customers, we just have to supply them. So it's a good problem to have, and we are doing quite well.

There are no further questions at this time. I'll turn the call back to management for closing remarks.

Thank you. Thank you all for tuning into our conference call. As usual, if you do have any further questions, I can be contacted by email. Thank you once again for tuning into the call. Stay well and stay safe.

This concludes today's conference. All parties may disconnect. Have a great day.