Greetings, and welcome to the Inter Parfums Third Quarter 2022 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, I’d like to remind you that this conference is being recorded. At this time, I’d like to turn the call over to Vice President at The Equity Group in Inter Parfums Investor Relations representative, Karin Daly.

Thank you, Daryl. 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 their most recent Annual Report on Form 10-K and subsequent quarterly reports on Form 10-Q. Forward-looking statements speak only as of the date on which they are made, and Inter Parfums undertakes no obligation to update or revise the information discussed. It is now my pleasure to turn the call over to Mr. Jean Madar, Chairman and Chief Executive Officer of Inter Parfums. Jean, you may begin.

Thank you, Karin. Good morning, everyone, and thank you for participating in today’s call. Joining me will be Michel Atwood, who became our CFO on September 6 of this year, three weeks before the close of the quarter. As I mentioned on our last call, Michel came to us from Estee Lauder as Vice President, Finance and Strategy. In the short time he has been on Board, Michel has been instrumental in exploring ways to make our company more efficient and productive by driving scale and operational efficiencies across the company as well as taking over the leadership of our finance functions. For anyone new to Inter Parfums, keep in mind that when we refer to our European-based operations, we’re talking about our 73% owned French subsidiary, Interparfums SA, while our U.S.-based operations refer to our wholly-owned domestic subsidiaries. On both sides of the Atlantic, our business is primarily prestige fragrances and related products. In the four years, that I’ve been in the business, I don’t recall so many moving parts and forces outside of our control. The dollar-euro exchange rate, the war in Eastern Europe, the holdups in transportation and the supply chain, the regional resurgence in COVID and concurrent lockdowns and political turmoil throughout the world to name a few. And despite these headwinds, we have once again raised our guidance for 2022, based on a record level of October sales and order backlog. As we reported yesterday, we now look for net sales to come in at approximately $1 billion – I have to get used to it, $1.025 billion and diluted EPS of $3.40. As our forecast indicates, the holiday season is shaping up very well, and we are looking forward to a strong fourth quarter, which we are again supporting with a massive advertising and…

Yes. Thank you, Jean, and good morning, everyone. I’m delighted to be on today’s conference call, my first at Inter Parfums. With two months under my belt, I am more convinced than ever that I made the right career move. It is a great organization under the leadership of Philippe and Jean, with amazingly talented and dedicated people at all levels and in all locations. In addition to my finance, M&A and strategy responsibilities, I have been given carte blanche to drive scale across the entire company, with the ultimate goal of establishing the building blocks and framework to support our next billion in sales. Moving on to our financial results. Foreign currency exchange rates continue to have a significant impact on the third quarter and year-to-date performance. The U.S. dollar relative to the euro hasn’t been this strong for 20 years. And as you know by now, a strong U.S. dollar has a negative impact on our sales. In fact, the average dollar-euro exchange rate depressed sales by 5% for the third quarter and nine-month period. On the flip side, a strong dollar boost gross margins 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. As we reported last month, third quarter sales rose 7% to a record $280 million from $263 million in the third quarter of 2021. Comparable foreign exchange rates, third quarter net sales increased 12%. It bears repeating that our 2021 third quarter net sales were 64% ahead of 2020 third quarter, making for a difficult comparison. Year-to-date sales rose 16% to $776 million from $669 million in the prior year. For our European-based operations, third quarter gross margin was 69.5% compared to 66.6% one year earlier, with a…

Thank you. We’ll now be conducting a question-and-answer session. [Operator Instructions] Our first questions come from the line of Linda Bolton-Weiser with D.A. Davidson. Please proceed with your question.

Yes. Hello, and congratulations on a good quarter.

Thank you.

So just one little housekeeping item. It looks to me like the special – the two special items were about $0.14 per share. So is it true that you roughly raised the guidance by that amount? Is that the way to think about it?

Yes, that’s the right way to look at it, yes.

Okay. And then so it’s nice to see the rebound in like what I look at is organic sales growth in the fourth quarter. It looks like it’s going to be a nicely double-digit number. So that’s really excellent. Is there any way to quantify the impact on sales of the component shortages in the quarter? Like how much higher sales could there have been if you hadn’t had those problems?

Yes. So Linda, we – I think you’ve backed out the numbers appropriately. Our guidance assumes about 18% growth in quarter four, which is pretty close to what we did year-to-date at 16%. Obviously, there’s 6 points of FX headwinds. So on an all-in basis, we’re actually – or an organic basis, we’re looking for 24% of growth. We had about $10 million of sales that we shipped in Q4, which we probably should have had in Q3. So that’s going to represent about 5% of growth.

Okay. Thank you. That’s helpful. And then, I mean, Coty did a lot of talking on their call as well about the component shortages. So it’s definitely a significant industry problem. What’s the status of that now? I mean has it improved? It sounds like it’s better because you’re being able to ship more sales. But can you just give a little more color on exactly what the issues are with those components?

I can try. So that’s true that we have moved some sales from third quarter to fourth quarter. But still – I still think that we have missed because of a component shortage, we have missed some sales, some reorders that we can – we just cannot ship. How about the situation? I think it continues to be bad. It was terrible in the first, I would say, six, seven months. But we have taken some actions to place more orders to anticipate also better components. And we have also decided to diversify our sources of supply. So as we have taken this action quite early in the year, we are seeing some of positive impact now. But I don’t see the situation improved, especially on glass and especially on pumps. And as you know, if we don’t have glass, we cannot fill the product. So that’s number one. On the top of that, to make things even worse, we had some major price increase on glass because glass use a lot of energy. To make glass, you use a lot of energy. And the pricing is increasing a lot. So against that, we have decided to do another price increase beginning of January. And so all our customers are – know that we’ll have a price increase in January. Is it helpful, Linda?

Okay. Yes, absolutely. Thank you. And just the final question for me, if I could. You talked about just the strength in fragrances. So the demand is so strong, and Coty reaffirmed that as well. So you said maybe no big launches in 2023. I’m curious about on A&P spending, does the same theory apply? In other words, why do you need to spend all that on A&P maybe in 2023 when demand is so robust anyways? What are your thoughts on that?

I’m going to try to answer that. I think that the spending of A&P is very important to ensure the sell-through, especially in this critical moment. The business is good for almost everybody. But it doesn’t mean that we have to stop spending. And that’s why we will continue to spend at a level of, I think Michel mentioned, around 20%, 18%, 20%, something like that. It’s quite high, but we think it’s necessary. We still think that there is a strong demand for fragrance, in general, for our brands in particular. I think that we are still able to increase market share in an increasing – in an industry that is increasing at a fast pace for fragrance. So we will – even though the market is strong, we will want to continue to invest in advertising. Michel, you want to try to answer?

Yes. I would also just add that, I mean, even if demand is strong, I mean, at the end of the day, it’s a very competitive environment, right? And we need to make sure that our brands are top of mind and that we’re driving the right level of awareness, the right level of trial with our sampling programs. So at the end of the day, it’s also about maintaining the right level of share of voice to be competitive in this industry. Sorry.

Surething.

Okay. Thank you so much.

Thank you. Thank you very much, Linda.

Thank you. Our next question is come from the line of Kurt Anderson with Jefferies. Please proceed with your questions.

Hey guys, it’s Kurt on for Ashley. Congrats on a great quarter.

Hi, Kurt.

So just first question here, as you guys are thinking about 2023 and the recovery of travel retail in China, how are you guys planning the business around our repatriated demand from China to other markets as travel retail kind of resumes outbound from China? And what do you kind of envision being – remaining domesticated as far as once travel retail opens up in the region?

Michel?

Yes. So I mean, essentially, as you’ve seen while the China business has been slow, our overall Asia-Pacific business is up 23%. So we have made sure that we’re investing heavily in the domestic markets, even though we probably lost some sales related to China and the Chinese traveling consumers. So we have been monitoring inventory levels very closely, particularly in China, and we have been working in partnership with our distributors there. So I think that kind of covers off the piece on how we’re dealing with China currently. The other thing is we’re obviously monitoring very closely how the markets reopen. And we’re obviously ready with our distributors to reinvest in China and put the business back on the growth trajectory. As you know, China has been growing quite significantly. The fragrance business has been growing quite a lot in the last couple of years. And we believe that there’s huge potential in the China market. We will continue to invest there. But obviously, at this point in time, it doesn’t really make a lot of sense to do that, but we’re monitoring this very closely.

Got it. Thanks. Just a follow-up…

If I may add, I would like to say that in our projections for 2023, and we will release them, I think, what, in a couple of weeks, Michel, we are not counting on the business – on a strong business in China at least for the first and second quarter of 2023. So we’re going to be very conservative in our numbers regarding China. We do not think that the situation will improve before maybe the first three quarters of last year. So we’ll take a very conservative approach. It’s okay. We – as long as it’s in our – it will be in our numbers, we’ll accept. But we have – the good news is that we have other markets that are continuing to grow, and that’s where we will find the growth next year.

Got it. Thanks. You just answered one of my – half of my follow-up question. So is it prudent to plan a recovery of the travel retail business kind of along the same timeline as you’re thinking about the Chinese business?

Michel?

Yes, I would say, yes. I mean, probably the travel retail business, we expect, will pick up more rapidly because I think once they reopen, there’s probably a lot of pent-up travel. I think if we just look at what’s happened in Europe and in the U.S., reopening has triggered quite a lot of travel. So that might pick up a little bit faster.

Got it. Okay. And then just one more for me. Looking at the A&P spend in Q2 and just the actions that have been taken with Zinédine Zidane kind of in the front end for – I believe you said it was Moncler – I’m sorry, Montblanc. How are you guys looking to kind of parlay the World Cup with the holiday season? You guys aren’t the first to tap a footballer ahead of a big tournament. I think your – just replaced Johnny Depp last year with Gilead and Bupa, and then HUGO BOSS also activated a number of footballers ahead of 2018’s World Cup. Just kind of wondering how you guys are looking to leverage that event in the global kind of stage that it’s going to demand?

Yes, it’s a very good point. We think that the soccer players and all the activities around the football, soccer, especially around the World Cup is an interesting point of communication for our brands. I just came back from a visit in the Middle East because we have – we are just starting to advertise strongly with Zidane on Montblanc. And we will have, during the World Cup in Qatar in the Emirates in Dubai and Abu Dhabi, where people are going to travel a lot. We’re going to have a lot of our billboard and advertising. So we think it’s a good medium. It’s a good – it’s a very positive personality. So we think that it will help the sale of Montblanc.

Great. And what are your thoughts on France’s chances to repeat as World Cup champion this year?

I wish, but I think that the competition is fierce. We will look at this. Absolutely.

It’s too big a tournament. Thanks a lot for the time and congrats on a great quarter.

Thank you very much. Thank you.

Thank you. Our next questions come from the line of Hamed Khorsand with BWS Financial. Please proceed with your question.

Hello, Hamed.

Hi, my first question was regarding inventory. You’ve been growing that all year foreseeing this kind of tightness. What do you think is a good inventory number, going forward? And are you ordering more of the glass and the pumps just in case? How are you looking at that for 2023?

Also a very good questions. As Michel said, we think that there is a low risk to carry more inventory of glass and pumps and caps because there is no seasons, because, like Michel mentioned, there is no risk of – for these components to become obsolete after three months, six months, nine months or even a couple of years. So we think that with the margins that we have, it’s better to carry a little bit more inventory. Let’s not – I don’t think we should get carried away and go to an extreme. But Michel, I’m sure, will give you a more precise answer than me. But me, I will say that if we go to five months of sales for inventory, so if we turn our inventory a little bit less than 2 times a year, I think it’s acceptable. But Michel, you’re going to tell me that it’s too high, right?

Yes. Actually, we’ve been having these conversations with Jean. I mean, historically, our inventory levels are at about 180 days. We are a little bit higher because we have, I think, made it not only have we made inventory bets, but as you all know, building a fragrance is kind of like making a cake. If you’re lacking one of the ingredients, you can actually convert that into the finished product. And so I think we probably have a bit more components than we would like for that reason at this point in time. But I would say, our goal is I think 180 is where we’ve been. And certainly, I think five months would be a good stretch target to be working towards at this point in time. But it obviously requires relooking at make – sometimes inventory can also be a trade-off between your margins – your gross margins and your inventory levels. You could always get lower inventories. But then you may end up paying more on gross margins, for example. So I think it’s really about finding what’s the optimal level of inventory that drives total shareholder return and I would say, that is probably in the range of what Jean has laid out, five months to six months, for us.

Okay. And then the other question I had was I understand demand is still strong, but it seems like everyone’s have been facing these component situations. Is there a risk where the market actually shrinks because no one can actually address demand next year because of these component issues?

I don’t think that we cannot address the demand. I mean we still have a record sales. So we are doing more quarter-after-quarter, year-after-year. So I don’t think the market could shrink. There is a demand. We are supplying the demand, maybe not as much as we could or as fast as we would like. But I think that – I don’t see from all my travel and all my meetings with distributors, I do not see a sign of slowing down. There is more interest in the fragrance, in general. And this is really all over the world, Europe and the U.S. I wish you – we had the same thing in China. But maybe it’s good for us that China is slowing down because I think we will not have had enough inventory to supply them. So we – that’s why we do not anticipate the first – I mean, sales in the first six months to nine months in China next year. Or when I say we do not anticipate strong sales in China for the first nine months of next year. Michel?

Yes. Just to build on Jean, I think your question also relates to – I mean, bear in mind that we’re not the only ones that have been building up inventory. I think you see that pretty much across the Board with all of our competitors, whether it’s Coty or Lauder or L’Oréal, I think everybody has been building up inventory. And I think to a certain extent, that probably has put a lot more strain on the supply chain, as everybody was making those bets. So I think going forward, we should see – I think everybody is starting to normalize. We’re seeing that also in the conversations we’re having with our suppliers. The orders are getting back to more normal levels. And I think people are looking to eventually consume those inventories. So I think that should help offset for any of the growth that we might be seeing, going forward.

Okay. Thank you.

Thank you.

Thank you. Our next questions come from the line of Korinne Wolfmeyer with Piper Sandler. Please proceed with your questions.

Hey, thanks for taking the questions and congrats on the quarter. So just to kind of touch a little further on that last question. So how are you feeling about your ability to meet the demand in Q4? And what’s all baked into guidance? Like are we just playing catch-up from Q3? Will fund and are you expecting some demand from Q4 to get pushed into Q1? Just how are you thinking about your business to fill back demand here in Q4?

Whether that – yes, go ahead. Go ahead, Michel.

Yes. So as I said before, right, our guidance basically assumes 18% growth for quarter four. And if you exclude the FX, we’re looking at – we’re looking more at somewhere in the range of 24%. I think we feel that we have the inventory levels to meet that demand. I think a lot of the inventory that we have right now and that we’re ordering is also to enable us to get off to a fast starting quarter in 2023 and to meet our future growth. So we’re not concerned about our ability to hit these numbers. And obviously, we’re working towards doing more. We had a record quarter – record month of October. I think this was our highest sales ever. We sold $115 million, $120 million in October, and we were able to meet a lot of the demand. So not a concern for us at this point in time, and we feel pretty confident about our ability to hit our guidance.

That’s very helpful. Thanks for the color.

Yes. I will add that we knew that October will be strong because, like we said, we moved some of the shipments of gift sets into the beginning of the fourth quarter, so during the month of October. But on the top of the balance of gift sets that we didn’t ship in September that we have shipped in October, we had an enormous amount of orders. Also, reorders from people that we have shipped in August and September. We started to receive some orders in October, which is quite flat. So we know that stores are selling through quite fast. The first 10 days of November are also very, very, very high.

Very helpful. Thanks so much. And that’s awesome to hear the October number. Just pushing on the gross margin a little bit, too. Can you just provide a little bit more color on what would be the proper run rate going forward? Once these FX kind of tailwinds are past us, is – are the pricing actions you’re taking able to fully offset some of these like cost pressures? Just how are you thinking about the expansion opportunities here?

Yes. I would say, there’s always a trade-off, which is at what level do you feel of the gross margin is right? So I would say that there are really two answers to your question, right there. I mean the first one is, we will obviously continue to take pricing where we can. We’ll obviously try to enjoy elaborated on the fact that we’ve taken pricing this year. We’re going to take another 5% early next year. But ultimately, our goal really is to recover in that area. But if we can, we’ll obviously try to look at efficiencies to keep our costs affordable to the consumers and meet the right price points. Now in terms of long-term, I think at this point in time, I mean, these are the gross margins that we’re kind of targeting long-term. We’re not looking to necessarily expand gross margins for multiple reasons because at the end of the day, it’s about value equation to the consumer. You’re selling a product at a certain price point, but you’re also selling value to the consumer in the form of a beautiful packaging and a great juice. And we want to make sure that our innovation is competitive and our products are competitive. So we’re not necessarily looking to expand our gross margins. We are looking to reinvest any efficiencies and gains into our products and into our future innovation.

Very helpful. Thank you.

Thank you.

Thank you. Our next question has come from the line of Linda Bolton-Weiser from D.A. Davidson. Please proceed with your questions.

Yes. Hi, just one follow-up here. I’m just curious on the fourth quarter gross margin. I mean it was quite strong here in the third quarter as you talked about the FX benefit. So you’ll still have that FX benefit in fourth quarter, but you’ll have more gift set shipments, which dampened gross margin. So do you think gross margin will be higher or lower in the fourth quarter?

At this point in time, we’re assuming that gross margins will be in line with what we’ve done in the first nine months of this year. We – while we certainly have the gift set impact, which will slightly hurt us, we also have favorable mix and brand mix and particularly on brands like DKNY that are new, that we’re selling more of our businesses being sold direct into the department stores, which is accretive to our gross margins.

Great. Thank you very much.

Thank you, Linda.

Thank you, Linda.

Thank you. There are no further questions at this time. I would now like to turn the call back over to Michel Atwood for any closing comments.

All right. Well, thank you very much, everyone, for your time. Just one last point. The D.A. Davidson Beauty and Wellness Bus Tour is making a stop at Inter Parfums on December 13, and Jean and I will be welcoming Linda Bolton-Weiser and her clients at that time. And since this is our last conference call of the year, Jean, I wanted to just send our best wishes for a joyful and peaceful holiday season, along with the good health for you and your families in the coming year. We also want to take this opportunity to again thank our teams for all the hard work and commitment during 2022. It has been another difficult year in many aspects with lots of its challenges. So I really wanted to thank you for joining us this morning. If you have further questions, please contact Karin Daly at the Equity Group, and she’ll be happy to help. Stay well and stay safe.

Thank you, everyone.

Thank you. This does conclude today’s teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.