Greetings, and welcome to the Inter Parfums 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. [Operator Instructions] Please note that this conference is being recorded. As a reminder, this conference -- 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 Inter Parfums annual report on Form 10-K for the year ended December 31, 2021, and other reports Inter Parfums files from time to time with the Securities and Exchange Commission. Inter Parfums does not intend to and undertakes no duty to update the information discussed. I will now turn the call over to Jean Madar, Chairman and CEO of Inter Parfums. Mr. Madar, 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 Inter Parfums. 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 deserved 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 Inter Parfums 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 strategic oversight for the fragrance category where he led a team of finance professionals across the globe as a key member of ELC's senior finance leadership team. Michel also spent more than 20 years at Procter & Gamble, where his final title was Divisional CFO of Global Prestige Fragrances, 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 seat Russ is vacating at our Annual Meeting of Shareholders on September 9, 2022. So again, thank you, Russ, for all this time with us. For anyone new to Inter Parfums, 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 U.S.-based operations refer to our wholly owned domestic subsidiaries. In both sides of the…

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 Inter Parfums 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 U.S. dollar relative to the Euro hasn't been this strong for about five years. And as you must know by now, a strong U.S. 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 U.S. 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 second quarter,…

Thank you. And at this time, we will be conducting our question-and-answer session. [Operator Instructions] Our first question comes from Linda Bolton-Weiser with D.A. Davidson. Please go ahead.

Thanks. Well, Russ, fun farewell to you, and congratulations on everything you've done and good luck in the future.

Thank you, Linda.

We'll miss you. So just to start out, in the quarter, I guess, the thing that was most different from our expectations was the gross margin and, I guess, it would benefit from the weaker euro, but yet, it was down year-over-year and down sequentially. So can you just explain a little bit more? I know you started to give some color, but can you just -- if there's any way you can quantify certain impacts, that would be helpful. And then kind of what do you expect maybe gross margin in the second half, roughly? Thanks.

No problem. It's really quite a little bit of an anomaly, because if you look at the details between both our European operations and U.S. operations, the gross margin actually went up. In the European operations, it went from 66.8% to 66.9%. And in the U.S. operations, it went from 53.3% to 54.3%. And I'm talking here for the three months ended June. It almost the same effect for the six months as well. The reason the consolidated gross margin appears to have declined is really the mix between the U.S. operations and European operations. We have in the -- for the six months, we have a 72% increase in sales for U.S. operations compared to a 9% increase for European operations. And of course, that 9% is low because of the exchange rates, but it's the overall mix in U.S. dollars of a higher U.S. business that has created this anomaly of appearing as if gross margins actually declined. Overall, the -- as we would normally expect the foreign currency exchange rates together -- clearly -- together with some price increases, clearly mitigated the incremental cost on components and transportation in both European and the United States operations. So overall, we were actually very pleased to see continued expansion. Going on into the future, one of the things that also, as I mentioned in my remarks, that helps our gross margin is when we can increase sales from our U.S. distribution subsidiaries, as we continue to ship more wholesale product through our own distribution subsidiaries in the U.S. as opposed to third-party distributors. We should see continued expansion within the gross margin.

Okay. Thank you. That's very helpful. And then just that issue that you've talked about with the software changeover. Just so I understand, is that in your own captive distributor organization that issue? Or is it an outside party? And then is that all cleared up now? Or are all the impacts behind you? Or will there still be some impact going forward?

When we started our own U.S. distribution, we partnered with a third-party in both sales and inventory management. Today, the sales are 100% controlled by Inter Parfums, but we still use this third-party for inventory and inventory management. So it's this third-party that changed the software within their distribution center that impacted their ability to ship some of our products, mostly in the first quarter with a little bit of carryover into the second quarter. From what I understand, this issue has been rectified, and we should not see additional impact from the software changeover by our logistics partner going on into the third or fourth quarter of 2022.

Okay. Great. And just a little kind of housekeeping. The DKNY, when that comes in, in the third quarter, is that going to be in the Europe or the U.S. division?

DKNY is in the U.S. operations. And we will be -- we manufacture product all over the world for our U.S. operations. But all of the DKNY will be through U.S. So all the profits will be 100% to the bottom line of Inter Parfums, Inc. There won't be any minority interest share as a result.

Okay. And is there any way to quantify how much the Ferragamo and Ungaro contributed in the quarter to sales? Was it about $10 million or a little bit more than that?

Well, you asked the same question at the end of Q1. Let me just quickly see if I can.

It was a little bit above $10 million. We can check.

Yes. It was closer to -- yes, closer to $12 million, almost $13 million.

For three months.

Yes, just for the three months.

Okay. Thank you so much. I'll pray for that. Thanks.

Thank you.

Thank you, Linda.

Thank you. Our next question comes from Steph Wissink with Jefferies. Please go ahead.

Thank you. Good morning everyone. And I will echo Linda's comments, Russ. We're going to miss you. Thank you for everything you've done for us. I have a question for you on pricing. I think you mentioned you've already taken a mid single-digit price and another possibly low to mid single-digit price to come. Share with us a little bit about the timings and what you're anticipating in terms of any change in demand -- if you've seen any change in demand? And then is that pricing fully covering your cost based on your current cost structure? And would it also cover your cost based on, Jean, what you mentioned in terms of relocating your infrastructure into the U.S. from China?

So the sales price increase has been in effect and everybody has accepted, integrated, it's worldwide. We told all our customers that they are going to see another price increase towards the end of the year. We don't know if it's going to be between 3% to, let's say, 6%. Certain markets have different retail price than others. Honestly, there are so many companies doing price increase so that there is no -- how should I say, there is no resistance -- there is not the same resistance than before. So we were checking -- I was checking yesterday, the margins in the last 30 days, for instance, because the price increase has been on for a while now, and we see a nice impact -- positive impact in our margin. So I don't want to say that we absolutely need a price increase at the end of the year. But I think that it was reasonable to give a long lead time to all our retailers and our distributors so there is no surprise. As of now, our cost of goods is very acceptable. Our margin is acceptable. But again, because of lack of visibility, we don't know, and I prefer to announce a price increase coming at the end of the year. If we don't need it, I will delay. If we see that the margins are maintained, if we see that our suppliers stay at the same -- with the same kind of pricing, if we see that we don't need, we will delay. But I think it was important to give this information to our customers. Russ, do you want to add something?

Yes. The only thing I would add is, clearly, we've been able to absorb through this price increase the incremental cost. Today, we're starting to see a little bit of lowering and especially in the transportation side of the business. Transportation cost is just starting to come down a little bit. So we're kind of hopeful that that might continue. But clearly, we've been able to absorb all of the incremental inflationary pressures that we've seen with the price increase that was instituted earlier in the year.

Right. Very helpful. And Jean, one for you on your comments regarding the renaissance of travel retail. I'm wondering if you have any data that you can share with respect to summer seasonal demand within travel retail? Any sort of improvement?

Difficult to quantify, but the feel that I can tell you is that we've seen orders plenty of orders from duty-free operators in Europe, in the U.S. and DKNY had quite a good exposure with travel retail, and we were talking to all the operators that are carrying DKNY and they gave us some very optimistic projections. That's why I said at the beginning of my comments, we cannot change too frequently our guidance. And some people are going to say, Oh, but we have almost $500 million in the first six months. Of course, we're going to do -- we're going to be able to do the $1 billion. It's not that obvious. A lot of things could happen. But we take each good news at the time. And definitely, travel retail is going into the right direction. Let's not forget that we have not seen orders for years. So it's quite refreshing. And the [indiscernible] as I said, are packed full. It's almost impossible to book a ticket. So there is strong activity and this is going to help us, especially in the third and fourth quarter.

Helpful as always. Thank you.

Thank you.

Thank you. Our next question comes from Hamed Khorsand with BWS Financial. Please go ahead.

Hi, good luck, Russ, on your retirement. Congrats.

Thank you very much, Hamed.

And I'd just wanted to start off with the euro weakening against the dollar. Does that accelerate or make you rethink about your capital structure as far as the debt in euros and paying that off quickly or maybe even getting more euro-based debt?

The debt that we had -- that we have in our book was really to buy the headquarter. We are paying it over 10 years. It's -- we swapped the rate to a fixed rate. I think we're paying, what 1%, Russ?

Yes, there's a maximum -- there's actually a maximum cap of 2% on this debt -- on the debt that was swapped.

But right now, the cost is 1%. So it's very reasonable. Now I will leave -- and it's our French company who has the debt and their income is in euro. So I will leave the debt in euro.

Okay. And then the other question was, are you seeing any changes in ordering habits at retailers in Europe and your European region just given the inflationary pressures there?

Not really. We have not seen any negative impact in terms of orders coming from Europe. We saw some slowdown at certain retailers coming from the U.S. We know that certain retailers have heavy inventory. But again, this doesn't have any impact on our projections. But when it comes to fragrance, I will say that the level of inventory worldwide is -- for retailers is at a very acceptable level.

Okay. And then my last question was going to be, how are you planning on for 2023 releases? And is the macro environment having an impact as to what your schedule would look like?

Thank you. It's a great question. We have a lot of plans for 2023. Even though there will be no blockbuster in 2023, we have -- each brand is going to have flankers and complements. And honestly, with the strength of the business, we do not need to play all our cards in 2023. We will keep some of the cards for 2024. We are optimistic for 2023, again, by spending the amount of advertising and marketing that we are doing close to 20%. So we are back to this kind of high level numbers. This is a guarantee for our future sales. So we are confident for -- we are very confident for 2023. That's why we delayed some important launches because we don't think we need them that early.

Okay. Thank you.

Our next question comes from Linda Bolton-Weiser with D.A. Davidson. Please go ahead.

Yes, hi. I just wanted to follow-up in -- to gain a better understanding of that change from China to U.S. and Europe production. Can you just explain -- I knew you were always getting components from China. But I was never aware that you were actually doing some filling in China?

Yes, thank you for this question. Yes, we have been doing -- when the U.S. put sanctions against China with tariff, 25% increase, we decided to switch a lot of production, for instance of Anna Sui, production, we're talking filling in China. And in the last, yes, 18 months, almost 24 months, we were doing the filling of Anna Sui in China, which is something I have decided to change. So Anna Sui will not be filled anymore in China. We are stopping with that. We were buying a lot of components in China. We will be buying much less components from China. We think it's -- we're better off. It's not at all a statement against China at the contrary. But I think that we have to source components closer to where the finished product is sold. And we have seen, for instance, products traveling, components traveling all around the world from China and to be partly transformed in Europe and come to the U.S., then shipped back to China. This is totally insane. And it's a decision that we've made. And of course, we were a little forced to do it when you look at the cost of the transportation. And also, when you look at the delays, delays in port, delays in manufacturing, delays in shipping. It was almost impossible to forecast production, et cetera. So we feel more secure by producing closer to where we sell.

Okay. And can you tell us, are you still shipping some to Russia?

No. From the -- for Russia, we do not ship any products from the U.S. The rules are very clear. We have stopped shipping day one any products from the -- that are made in USA, we do not ship them to Russia. So we stopped almost six months ago. We stopped all our business with Russia. But our subsidiary in France and in Italy have -- will follow different type of rules as long as the product retails for less than €300 or $300, they have the right to ship. So the French subsidiary and the Italian subsidiary could legally ship to Russia. Of course, the business is down because there is less demand, I will say. But for us, we estimate that it's a loss of $20 million to $30 million, the fact that we are shipping less from Europe and zero from the U.S. But again, these numbers are already included in our guidance.

Thank you very much.

Thank you.

And there are no further questions at this time. I'll hand the floor back to management for closing remarks.

Thank you, and thank you for tuning into our conference call. I hope some of you will be able to attend our Annual Meeting at 10:00 a.m. on Friday, September 9, at our headquarters in New York. If you have any further questions, please, as usual, contact me by e-mail. Stay well and stay safe. Thank you again.

Thank you, everyone. Thank you for attending this conference.

Thank you. And that concludes today's conference. All parties may disconnect. Have a great day.