00:04 Hello, and welcome to the Inter Parfums Third Quarter twenty twenty one Conference Call and Webcast. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. 0:25 It’s now my pleasure to turn the call over to Russell Greenberg, Executive Vice President and Chief Financial Officer of Inter Parfums. Please go ahead, sir.

00:34 Thank you, operator. And good morning, everybody, and welcome to our third quarter twenty twenty one conference call. 00:43 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 thirty one twenty twenty 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. 01:26 When we refer to our European based operations, we are primarily talking about sales of prestige fragrance products managed through our seventy three percent owned French subsidiary Inter Parfums SA. And when we discuss our U.S. based operating we are primarily referring to sale of prestige fragrance products managed through our wholly owned domestic subsidiaries. 01:53 Back when we announced results for the twenty twenty third quarter, we were pulling ourselves out of the business of this of the second quarter, following the measures undertaken to combat to COVID-nineteen pandemic. 02:11 Shortly thereafter, we announced our initial twenty twenty one guidance when visibility was extremely poor. As we were faced with uncertainty as to when stores would reopen, when shoppers and store personnel would return, when social distancing requirements would be minimized and when all the other restrictions that we endure during the peak of the COVID pandemic would be lifted. 02:42 It was lack of visibility, not conservatism when we initially forecasted twenty twenty one sales guidance in the range of six ten million dollars to six twenty five million…

08:40 Thank you, Russ. And good morning, everyone. On our second quarter conference call in August, I summed up our message with three sentences, business is booming, demand is strong and actually all our brands are outperforming what we budgeted at the start of the year. 09:04 I cannot say it any better on today's call, but what I can add is that we have made two important accretive brand license acquisitions which have a potential to accelerate our growth rate even further. 09:22 I spoke about Ferragamo at glance on our last call, but there are a few most points I would like to make. Ferragamo has been in the fragrance business for a long time and was operated by the Ferragamo Fashion House. If you go on to the Ferragamo website, you will see that in twenty nineteen it's fragrance sales were eighty seven million, around one hundred million dollars. That number was slashed in half in twenty twenty when the Ferragamo family made a strategic decision to go to an outside partner, which was us. I believe that we earned that trust and confidence because we are committed to understanding and incorporating what the Ferragamo name means. 10:15 To preserve existing know how and experience, stay close to Ferragamo rules and promote future development of Ferragamo perfumes in observance of the brand values, we are operating the business through a dedicated wholly owned Italian subsidiary. We hired about twenty five of their employees to work in finance, marketing, operational and sales and we are manufacturing Ferragamo fragrance in Italy and sourcing most of the components from Italy. 10:54 Initially, our focus is on Ferragamo’s last suite of legacy fragrance, but we are planning to launch a new blockbuster sent towards the end of twenty twenty three. We…

19:49 Thank you. [Operator Instructions] Our first question today is from Linda Bolton-Weiser from D.A. Davidson. Your line is now live.

20:21 Yes. Hi. So congratulations on a great quarter. So, I'm just curious about the gross margin and all your comments on the drivers there. It sounds like some of those things will continue in the fourth quarter as well. And sometimes the gross margin is actually lower in third quarter because of holyday gift sets and then higher in fourth quarter. So what do you think the gross margin? Can we see such a strong gross margin in the fourth quarter as well?

20:54 I think that to the extent that one of the major increases and the reasons for the increases in the margins was the growth in the U.S. business where we sell direct to the retailers. That is definitely going to continue in Q4, that has continued and been very, very strong all year. 21:18 Our sell through at the retail level is very strong. So we're expecting consistent reorders in that regard. So I would think that the margins are going to continue to be high for the rest, certainly at least the rest of this year. 21:32 With respect to some of the other gains in margins because of product mix. Yes, usually, there is a little bit more of gift set selling in the fourth quarter than there is in the third quarter. But I don't think that that's going to be outweigh by the gains we're to see on the retail -- on the sales at wholesale level to the retailers.

21:55 Okay. And then is there any way of quantifying how much sales – how much in sales was pulled forward from fourth quarter into third quarter?

22:07 That's really difficult to determine. We really haven't been able to quantify it to a great extent. So --

22:20 What we can say is that, the third quarter sales were extraordinary. I was looking at the numbers yesterday before the call, and I asked Russ if it was a record third quarter. We had to go back something like ten years when we stopped our Burberry license. 22:48 So for sale, it was a record. What happened is quite interesting. As we said in our remarks, the U.S. is really booming, because we think that in the last twelve to eighteen months the consumer have habit in the U.S. have changed. They used to buy fragrance to wear outside. But with the confinement, they are still at their home and they use -- they have the possibility to buy fragrance online and try different things. So today, we have consumers who are buying fragrance for themselves and they feel good about wearing done with the fragrance. 23:40 That's the only way we can expect such growth in the fragrance business in the risk. Not all the segments have been growing thus far, perfume are definitely the fastest growing segment for twenty twenty one.

24:01 To quantify just a little bit, for the nine month period sales in North America for us was up over eighty seven percent, which was more than twice as fast as the next highest growing market from a geographic standpoint. So, clearly, this is something that -- that's what makes it little bit hard to quantify, but it's something that we're seeing that really has been unprecedented in the years past.

24:33 And I will add also that to -- on the top of this strong business in the U.S. we saw some long term changes in our business in China. I don't know if you remember, but we said for a long time that fragrance was never a priority for our Chinese customer. Of course, they prefer to skincare and make up, but again there is a chance here and we see strong, strong interest from young customers shopping fragrance. And we are going to capitalize on that. And that's why – if you want we can speak about it at length. 25:23 We have decided to spend so much advertising in the fourth quarter. Something that is not – not more advertising that you will have expected.

25:41 Okay. Sounds good. And then my last question is just on Ferragamo. How is the inventory situations there? And will there be -- is there any way you can quantify or give some feel for how much sales there might be in the fourth quarter?

26:00 We have purchased inventory when we signed the license agreement with Ferragamo, there is sufficient inventory as we say for the beginning, the first three month of Ferragamo business, which is October, November, December are going to be transitional months. So I'm not expecting big numbers, the real business is going to start in January.

26:34 As Jean mentioned in his remarks, the Ferragamo business was over eighty million dollars back several years ago and was cut in half due to the pandemic, which would imply that on an annual basis, it would be somewhere around forty million dollars, forty five million dollars. To be somewhere at twenty percent or twenty five percent of that number wouldn't be unrealistic. So, it's really not a material number compared to what our sales are on an annual basis. But as Jean said, the real business for Ferragamo was really gearing up for twenty twenty two.

27:14 Okay. Thank you very much.

27:16 Thank you, Linda.

27:18 Thank you. Our next question today is coming from Wendy Nicholson from Citi. Your line is now live.

27:23 Hi. So Ferragamo forty, but used to be eighty. Did you see what the Donna Karan sales were and what you think next year. I know it doesn't start until next summer, but on a run rate annually, how big Donna Karan could be?

27:39 We did not say -- Ferragamo was a publicly held company, so their information is public --

27:47 We are public company too. We estimate that DKNY business was around historically in one hundred million dollars when it was at Estee Lauder. Our goal will be to bring it back to this level in the next two to three years.

28:17 Got it. Okay. Well, that's awesome. That's great. Question on the A&P. I understand your spending a lot in the fourth quarter, but for the full year as a percentage of sales, you're kind of in the twenty one percent which is where you were sort of pre-pandemic, like twenty seventeen and twenty eighteen. So, kind of do you think longer term twenty twenty two, twenty twenty three just generally speaking, is that twenty one percent of sales on A&P kind of the right place to be or given that the business is more global, whatever do you think it needs to be bigger than that?

29:00 You are right. Historically, I think it even goes through twenty nineteen, we were pretty much at twenty one percent for three four years in a row. And that included the growth that we had in sales. Twenty one percent seems to work for us. It's kind of an internal I won’t say target, but an internal budgeting mechanism that we have. Depending upon certain markets around the world you spend more in certain territories than you do in other territories. But overall, I think it's going to hover right around that mark. I really don't see it increasing or decreasing by any sufficient -- by any significant amount.

29:42 Okay. Got it. That's all I had. Congratulations.

29:45 Thank you very much.

29:47 Thank you. Our next question is coming from Stephanie Wissink from Jefferies. Your line is now live.

29:53 Hi, good morning. Thank you for the question. This is Grace on for Steph. My first question is on the post pandemic world. And what do you think the channel mix will look like in the business as we kind of look out the next few years?

30:11Yes, I can try to answer this. Of course, we have seen a stronger growth of e-commerce sales. In particular, we started with low numbers, so the percentage increase is very high, but the numbers are still limited. We still believe in brick and mortar distribution. And this is where we are spending for this quarter a lot of money with beauty consistent with sampling, physical sampling, because we want people to smell our fragrance. We are also spending money in digital advertising on websites. 31:06 And what I think is, we are going to see finally a comeback from the duty free market. With travel retail is going to come back we have even started to buy some advertising in airports. And I did that not a long time ago, I took this decision three months ago. And I think we did it at the right time, because we benefited from some good rates and we are going to see from next month until the next two quarters a very nice increase in the travel retail. So -- and we have a right for that and that's why we want to spend so much in advertising in the fourth quarter.

32:01 Thanks. That's helpful. You spoke a little bit about it, but just kind of double clicking on the marketing mix. What are you seeing in terms of the changes in your marketing mix? And how have ad rates changed relative to prior periods in different verticals?

32:21 Well, certainly, the mix is definitely more and more concentrated on the social media aspect. We're doing a lot of work with influences, we're doing a lot of work with creating content for different customers and different social media aspect. 32:39 Your traditional magazine type of advertising is definitely on the way down. We do a lot, we spend a lot on billboards, we spend a lot on physical presence type of advertising and on television also in certain markets like Russia, Eastern Europe, TV works. We do also a lot of billboard in the middle east. But in the U.S. most of our expenses are digital.

33:17 Great. Thank you.

33:19 Thank you.

33:21 Thanks. Our next question today is coming from Hamed Khorsand from BWS Financial. Your line is now live.

33:27 Hi. So first question was just -- your expectation on the ad spending for Q4? Is that the timeline that you expect fall on orders in the first half of twenty two or more long term oriented? And how can you measure that actually?

33:52 This is an investment into not just Q1 or Q2 of twenty twenty two. This is really an investment in our brands, investment in the brands that are in our portfolio. Throughout twenty twenty one, the amount of spending was minimal, because our expectations were minimal. We had very, very -- I don't want to call it conservative, but very low visibility as far as where our sales were going to be. 34:24 Sales turned out to be much greater than expected. As I mentioned before, we've now raised our guidance three times. But the brands themselves and to keep and maintain and build market share for the different brands requires us to spend money. So this is really an opportunity to take some of the dollars that we've gained and invest it in the most valuable assets that we have. 34:51 And by putting it into these advertising and promotional programs, we're expecting to not only see growth in sales in Q1 or Q2, but really see a market share change, especially with expect to some of the larger brands and the newer brands within our portfolio. 35:11 So, we're really kind of taking this -- taking some of these gains that we've had and making an investment in the future. And that's what we're kind of doing. John maybe --

35:21 This is a strategic decision that we have made. Basically, the level of profitability of a company is very high and we do not need to keep this money – this extra money. We have more than -- like Russ said, we raised three times already our guidance. So the idea is to -- in order to continue the momentum and to accelerate this momentum in twenty twenty two. 35:54 We are going to spend a lot of money in advertising, so our market share will automatically increase. It's quite simple. And we think -- first we started this at the very beginning of October, we follow the results on a weekly basis. We have information on sell through almost on a daily basis. And as have put a lot of merchandise in the stores because of this amount of sales that we have. We have to make sure that this products sell through quickly in order to get a strong reorders in the first and second quarter twenty twenty two.

36:45 The last thing I'm just going to add to that is that, we've seen recently a huge change in fragrances as a category. And when you look at some of the NPD data, we're seeing growth in the fragrances as a category as a whole far greater than we have ever seen in the past. 37:07 The fragrance business was always very stagnant, it would grow at zero percent, one percent, two percent. Today we're seeing gains that are far greater than that and we're trying to take advantage. We are in the fragrance business and are a pure player in the fragrances business, and we're trying to take advantage of the growth that the category is seeing as a whole. 37:31 And I think you see it even with many of our competitors. I think the numbers that are out there and are being reported are far greater than they had ever been before. And we're just looking to take advantage of that.

37:45 Okay. And my other question was, as far as the duty free stores are concerned, how much inventory buying did you see in Q3? Is that happening at all to any extent? And are these stores just using inventory from when they were closed?

38:05 We have no inventory at Q3. We are starting to buy it again, the traffic really came back towards the second part of Q3. It is accelerating very fast. So, of course, we are trying to get the hands on inventory. But it's not easy for people who have not planned this purchased to find the inventory. We have commitments from retailers, we have commitments from our longtime partner who are buying on a regular basis. So to find today millions of dollars to support travel retail is not that easy. 38:47 We will support them, of course, going forward, but it's a good news for industry to see that people are back shopping in travel retail.

39:05 And my last question was, how prepared are you if the retail channel that you've sold to distributors in Q3 come back in Q4 with new purchases. Can you handle that logistically?

39:24 It has been very difficult already in Q3 to deliver this numbers with all the challenges that we have in the supply chain and in transportation. Now I think that we will not have enough products us to support Q4 as big as it was in Q3. But that's why we took a conservative stands for Q4. The important thing for us is going to be twenty twenty two. We need to prepare twenty twenty two with the right amount of inventory, right amount of investments. 40:11 So Russ, you want to add something.

40:16 The inventory levels right now because of the surge in sales in Q3, the inventory levels are very low at the end of September. Lower than we would to like them to be. So it's going to be a little bit difficult to meet the demand in Q4. But we are building, especially on the new product lines and the new launches that we have for twenty twenty two. So, we are sourcing from multiple different suppliers, we have increased our lead times as Jean mentioned on his remarks. We're taking the steps necessary or the steps that we deem to believe that are necessary in order to have sufficient inventory to move into twenty twenty.

40:59 Okay, great. Thank you.

41:01 Thank you, Hamed.

41:05 Thank you. Our next question is a follow-up from Linda Bolton-Weiser from D.A. Davidson. Your line is now live.

41:12 Yes, Hi, just a little housekeeping thing. Usually in the 10-Q you give the million dollar amount of advertising and promo spend. Just trying to give like a percentage, I guess I can figure it out. But do you have a particular dollar amount you can give us for A& P in the quarter?

41:28 I'm sure we can try find something for you. [Multiple Speakers] All I disclosed was the fourteen point two percent. So you are going to have to do a little bit of math or if you want, just call after and we can discuss it.

42:00 Okay. I'll figure out. And as long as I have you again, can I just ask you, in terms of setting up this subsidiary in Italy, do you have any like plans that you could expand the usage of that organization? Like, are there other Italian fragrances, I know, some the big ones are owned already by others. But do you say that you can sort of fold in other fragrances as a product into that units to be managed?

42:29 It’s a very good question Linda. Absolutely our presence is Italy is not only to handle the sales of Ferragamo. It's not only to manufactured products in Italy, it's also to be closer to this market. Italy is a great market for luxury. There is a lot of brands, and to have presence in Italy we will -- we think will help us get in contact with brands that can be potential license for us. So it’s definitely part of our plan.

43:12 Great. Thank you very much.

43:15 Thank you, Linda.

43:17 Thank you. Yeah. I'm sorry.

43:20 No problem, sir. We reached end of our question and session. I'd like to turn the floor back over to you for any further or closing comments.

43:26 That's great. Thank you once again. And thank you all for tuning into our conference call today. Jean and I wish you all a very happy holiday season and the very best for New Year. And as usual, please if you have further questions, please contact me by email, stay well and stay safe. Thanks again.

43:46 Thank you. It does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.