Greetings and welcome to the Inter Parfums 2023 Second Quarter Earnings 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. 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 the Vice President at the Equity Group and Inter Parfums Investor Relations representative, Karin Daly.

Thank you, Diego. Joining us on the call today will be Chairman and Chief Executive Officer, Jean Madar; and Chief Financial Officer, Michel 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 heading Forward-Looking Statements and Risk Factors in our most recent annual report on Form 10-K and subsequent quarterly filings 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 the information discussed. It's now my pleasure to turn the call over to Jean Madar. Jean, you may begin.

Thank you, Karin. Good morning, everyone, and welcome to our second quarter conference call. Most of us are already aware that the fragrance industry is booming and we are pleased to have seen a continuation of that momentum during the quarter. With our increasing market share, we continue to be optimistic in our upward trajectory. In fact, we continue to fire on all cylinders to meet the needs of our distributors and retailers to ensure that we not only attract, but also retain both the new and very experienced consumer. On a consolidated basis, net sales increased 26% in the second quarter. This comes on top of a robust prior year period in which we had already experienced 18% growth. Beginning with our business by region, for the second quarter, our two largest regions, North America and Western Europe increased net sales 25% and 26% respectively. In Asia, despite challenges in China, we are doing well and we grew 17%, mostly thanks to a very strong business in Southeast Asia and Australia. We also experienced significant growth in other regions, including Eastern Europe and the Middle East, up 122% and 23% respectively. We continue to see renewed life in our travel retail business, particularly in the duty-free sector as demand for luxury and premium brands increased and digitalization of retailing process observed a boost in sales. With respect to our European based operations through our 72% owned French subsidiary called Interparfums SA, net sales increased 19% primarily driven by our top-performing brands, Coach, Jimmy Choo and Montblanc, that increased by 28% for Coach, 21% for Montblanc and 16% respectively compared to the prior year. Both Jimmy Choo and Montblanc surpassed $100 million in sales for the first six months of 2023. Montblanc sales were strong at $55 million in the…

Thank you, Jean, and good morning, everyone. Before starting, I just wanted to maybe make a small correction. I think in Jean's section, he talked about the growth of Montblanc, the growth of Jimmy Choo was 21% and the growth of Montblanc in the quarter is 16%. So quickly I'm going to touch on FX. Obviously, as you all know, FX had a major impact in 2022. But so far this year, it's only been marginal. For the second quarter of 2023, we had a favorable 1.3% year-over-year impact on net sales while it has had an adverse 0.5 year-over-year impact for the first half, so relatively marginal. Moving on to gross profit. On a consolidated basis, gross profit increased 23% to $188 million during the quarter. As a percentage of sales, gross margin decelerated though to approximate - by approximately 190 basis points. As you've seen in our press release, while we registered scale benefits from our sales growth, our price increases and favorable brand and channel mix, this was offset by a one-time conservative inventory reserve of $7 million related to certain underperforming brands within our European operations for which we have built inventory during the pandemic to protect service level. Excluding this one-time charge, gross margins would have expanded by 28 basis points compared to the prior year period. On a year-to-date basis, gross margins are flat versus the prior year period before adjustments. But the net of adjustments, we actually would be down by 110 basis points. For operating-based - for European-based operations, gross profit margin was 63% and 65.6% of net sales for the three and six months ended June 30. And that is down 390 basis points and 130 basis points compared to the corresponding prior periods. This obviously includes the inventory adjustments described…

[Operator Instructions] Our first question comes from Ashley Helgans with Jefferies. Please state your question.

Hi, thanks for taking our questions. So the first question, I know that this will be your first year having gift sets in a couple years. Just how should we think about Q3 versus Q4 sales? And then any color you can give us on the brands that were included in the inventory write-off? Thanks.

Michel?

Yes. So I mean, obviously, as you know, last year we had some supply challenges on gift sets. And some of the gift sets we think moved from Q3 to Q4. This year we're expecting to have more sales in the third quarter of gift sets and obviously less in the fourth quarter. So as we look at our growth for the subsequent quarters, we are seeing more growth in quarter three than quarter four as we look to the balance of the year in terms of growth rate. In terms of the inventory write-off, I think you've seen the communication from our colleagues at Inter Parfums, all of the brands are growing quite significantly, as you can see there is - we've had some challenges on Moncler. We had a pretty large growth in the base. And what we're seeing right now is a bit of a slowdown of that growth. So when we assessed our inventory levels, we're prudently decided that we needed to write down any inventory that we had that was beyond two years that doesn't necessarily mean we're going to destroy it. Obviously, we have all intents to bring them back on track and then hopefully manage to consume some of these, but we wanted to be prudent and reserve what we felt was right from an accounting standpoint.

Thanks.

Thank you. And our next question comes from Korinne Wolfmeyer with Piper Sandler. Please state your question.

Hi, good morning, guys. Thanks for taking the questions. Congrats on a good quarter. I'd first like to touch on kind of the margin outlook for the remainder of the year. And you did give a little bit of color, but I think we've previously talked about 18% operating margin target this year and kind of similar going forward with little bit of expansion. How is this inventory write-offs or the gross margin hit that you saw this quarter impacting that outlook if at all? And is that still kind of the right target to look at it if you look at the out years as well? Thank you.

Yes. Hi, Korinne, maybe I'll take that. And then, Jean, you can chime in.

Yes, alright.

Right now we're still projecting an operating income of about 18% that is consistent with our guidance.

Got it. Helpful. Thank you. And then just lastly on the increased A&P spend. As you think about the guidance for the remainder of the year, how much of that topline is baking in some benefit from your increased advertising spend? And then how are you thinking about the ROI of these investments both near term and longer term?

Yes, I think we regularly get these questions, right. I mean, the way our business model works is, you are basically selling in inventory ahead of certain key consumption periods. Obviously, there are a number of key consumption periods like Mother's Day, Father's Day, Valentine's Day and holidays that happen across the world. The big one obviously is the holiday season in December. And generally, what happens is we sell in the inventory and then we drive consumption in the store through strong advertising and promotional expenses. If you don't do that, essentially what happens is your inventory doesn't get consumed and you end up taking it all back in the subsequent quarter. If things go well, which is what we - been experiencing now for a couple of years is that advertising drives strong sell-out in the stores and then our retailers' reorder in January, February and March. So really, I mean, that's how we really typically will measure the ROI. Now in terms of where we spend, and I'll let Jean chime in after this, we typically obviously spend where we have the best ROI. We've shifted a lot of our expenses towards digital media. We selectively invested in outdoor where it makes sense. But generally speaking, obviously, we look at ROI for all of our expenses and we try to invest where we know that we have experience and there's been strong results in terms of return on investment.

Absolutely, yes. Digital is a big chunk of our spending and that we see a split between the two largest market, the Americas, North and South and Europe. And to go back to the margin, the 18% is absolutely feasible. We think that even though we have this - we took this reserve for our inventory, we will be able to do this 18% margin.

Thank you.

[Operator Instructions] Our next question comes from Hamed Khorsand with BWS Financial. Please state your question.

Hi. So, my first question was, could you just provide a little bit more granular level of what you're seeing as far as consumer demand goes? Is this really all being driven by the new products you've been releasing over the last 6 to 12 months? Is this growth driver really more about consumers just having more options to use at home? And then what your expectations on the consumers that are tapped out as to how many fragrances they have at home?

Hamed, it's very good question. I will try to answer. What we see in our lines, we see growth in our existing lines and also through innovations. So products that are - that have existed for more than 24 months are still growing, especially for our largest brand as Coach, Montblanc, Jimmy Choo, GUESS and DKNY, Donna Karan. And we see that - and we see that on top of this growth, we have growth coming from innovation, new products, new lines, flankers, blockbusters, et cetera. That's why we're having such growth which is bigger than our competition and bigger than the market. And we do not see - we didn't see it in July. We didn't see it in the first week of August. We do not see any signs of slowness. At the contrary, things are continuing to be quite good. We are shipping on time this year our gift sets so we have started to send them worldwide. So we'll have a longer sell-through for our gift sets. And like Michel said because we'll start stronger advertising in end of third quarter or beginning of fourth, we expect to have a good sell-through, so we can generate new businesses in January and February. So things are doing quite well.

Yes, Hamed, just to build on, on Jean, on this. So, first, the innovation is well-designed and well executed. The flying curves are intended to hero the halo on the rest of the lines, all right, and this is one of the reasons why our innovation is working, but also our historical lines because the innovation and the flankers are designed to do that. On your question around consumption, again, we don't get a lot of regular data, but what we are seeing very clearly and this is resulting in significant market growth, if you look at NPD data, for example, in the U.S., June NPD data was again very strong. The market is up 11%, is up 13% on a year-to-date basis. And what we're seeing really is there is clearly an increase in penetration in the category. There are new people that are entering the category. Historically, the U.S. was under-penetrated versus Europe. We're seeing that penetration growth and we're also seeing more usage. So coming to the point you're asking before, more fragrance usage as people may be wearing a fragrance in the morning and also wearing one in the evening or vice-versa. So all of these things are driving the category growth and we believe they are sustainable and we're not seeing any slowdown at this point in time.

And I would like to add also that we've seen a very strong trend with our men's fragrance business. Men's, as you know, is a smaller part than the women's business, but it's growing at a very fast pace. Men's used to have only one or two fragrances. Today they're willing to try more than one or two and we see it in our numbers.

And could you just talk about Q3 and the holiday inventory build season at the retail level? Is it any different than prior years that you've seen as far as how the retailers are reacting?

What - I can try. Retailers are - as you know, retailers are looking at their inventory very carefully. Most of them are on EDI with us, so they will order only based on the sale through in order not to create a huge backlog. And we do not see any problems of too much inventory or maybe at the contrary, I think, they are quite light just before the season. And this is I would say in the U.S. department stores and also in Western Europe, Germany, France, Spain. Michel?

Yes, I was - nothing really more to add. I think what we are seeing is typically last year what happened was gift sets weren't - because of the supply challenges, gift sets weren't available. So I think a number of retailers weren't able to be fulfilled and we saw probably more gift sets arriving in the second quarter - in the fourth quarter and basically being sold through the fourth quarter. So hopefully, with supply chain problems abating, we should start to see - we are starting to see earlier purchases and we should see - have a longer holiday season to sell the sets through.

Okay, thank you.

Thank you.

Our next question comes from Linda Bolton-Weiser with D.A. Davidson. Please state your question.

Yes, hi. So just a question on gross margin, I guess, with all the gift sets being more sales this year than last year and the third quarter, gift sets tends to be a little lower gross margin plus you have the stronger euro, which I think would hurt your gross margin. So I am sort of wondering if you can give a rough outlook for gross margin specifically? Like in the second half, do you think it can be up year-over-year or flat year-over-year? Is there any kind of rough way we should be thinking about gross margin in the second half of the year?

Yes. So right now, if you look at the first half, right, gross margins have been roughly flat. And I explained some of the reasons on the - ahead of - during the - during our prepared remarks. Right now, we are projecting - for lot of the reasons you've explained, we are projecting some erosion in our gross margin for the second half. One, we have obviously a bigger proportion of our business with gift sets. The other aspect as well as you know our U.S. operations is growing more rapidly than our European operations and our gross margins are typically lower on our U.S. operations. So those are some of the factors that are going to come into play. There's also obviously some of the cost increases that are going to continue to make their way through our costs - through our P&L. So those are some of the factors. So we - right now, we're modeling the slight deterioration in gross margins for the second half of the year.

And by that - by erosion, you mean on a year-over-year basis, is that correct?

Yes, year-over-year. Obviously, gross margins - yes, absolutely, year-over-year.

Okay. Thank you. And then, can I just ask you also about inventory. So it's creeping up a bit despite the fact that the component shortage situation is getting better. So, I guess I'm just wondering like are we running a risk of another inventory write-off in the future as your inventory creeps up here? Or maybe you can just talk about - are you targeting a certain inventory level for the end of the year? Just maybe some color on that. Thanks.

No, we think our inventory level is at the right level. Let's not forget that we're looking at a nice increase in sales, so we have to have inventory. And instead of chasing this inventory, we decided to take some stronger position than the years before. The good - so I do not think that will - that we will have another big reserve like we have done in the second quarter. But the good thing is when you look at our business, Linda, we don't have an issue with color or sizes or seasons. We sell the same product quarter after quarter as opposed to other industries. So we think it was the right thing to do to create this reserve for components - certain components that we have bought at the high levels of Moncler, but we do not see any other problem in the inventory.

Okay.

Michel?

Yes. No, nothing more to add.

Okay.

And can you just say whether China in the quarter - in the second quarter was up or down year-over-year in sales?

I don't know, China - Michel, do you have anything for?

Yes, to the best of my knowledge, China sales are actually down because we're - we continue to run down our inventories, but again China is relatively moderate in our overall sales number.

Okay, thanks very much. I appreciate it.

Thank you.

I just want to may be hold on Jean's comment around the inventory rate. I mean, normally, we don't have these kinds of write-offs. We haven't necessarily destroyed anything. I think we're just being prudent because we feel that the level of components was above for some specific lines - is above where we would like them to be. So this is more basically us being prudent. It doesn't necessarily mean that this will be destroyed and we've decided to completely write them off. We'll continue to monitor this. And if things can move very, very quickly, particularly for some of these smaller brands, you can get a very quick turnaround. It could be successful in the market. And the sales required to get these consumed is relatively small. I mean, remember we're looking at roughly a 2% write-down of our inventory. So it's relatively small in the overall scheme of things.

Thank you.

Thank you. There are no further questions at this time. I'll hand the floor back to Michel Atwood for closing remarks.

All right. Well, thank you again for joining our call today. Next month, we'll be attending the 2023 Piper Sandler Growth Frontiers Conference on September 12 and 13th in Nashville. And we'll return to New York to host our Annual Meeting at our headquarters on September 14. So, if you like to attend the Annual Meetings or have any questions, please contact Karin Daly from the Equity Group, our Investor Relations Counsel. Her telephone number and email address can be found in our most recent earnings release. Thank you again for your support and have a great day.

Thank you. This concludes today's call. All parties may disconnect.