Greetings, and welcome to the Inter Parfums, Inc. 2023 Fourth Quarter and Full Year Earnings Conference Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. At this time, I would like to turn the call over to Karin Daly, Vice President at the Equity Group and Inter Parfums's Investor Relations Representative. Thank you. Please go ahead.

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 headings Forward-Looking Statements and Risk Factors in their most recent annual report on Form 10-K. 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. As a reminder, the Company's consolidated results reflect its two business segments, European-based operations and United States-based operations. Certain prestige fragrance products are produced and marketed by their European-based operations through its 72% owned French subsidiary Inter Parfums, S.A. When the Company refers to their U.S.-based operations, they are talking about their wholly-owned subsidiary. It is now my pleasure to turn the call over to Mr. Jean Madar. Jean, you may begin.

Thank you, Karin. Good morning, everyone, and thank you for participating in today's call. We are seeing ongoing momentum in the fragrance market, particularly within the prestige and premium categories in which we play. Much of the growth we have seen can be attributed to premiumization as consumers are increasingly seeking high-quality and higher-concentration fragrances in today's market. The ongoing demand in our prestige portfolio of brands led to a record net sales of $1.3 billion in 2023, an increase of 21% compared to 2022. At comparable foreign currency exchange rate, net sales increased 20% in 2023, of which 5% was related to new brands. Similar to 2022, our successful growth during the year was attributable to our established brands and our new product pipeline dominated by extensions. Sales for each of our largest brands, Jimmy Choo, Montblanc and Coach rose above $200 million for the year, representing 49% of our total sales. Our fourth largest brand, GUESS, grew sales by a robust 23% and with a strategically planned pipeline of innovation, we believe GUESS is well on its way to also surpassing $200 million in sales in the coming years. In our European-based brands, there were also significant gains made by our midsize brands in 2023, including Rochas, Karl Lagerfeld, Van Cleef & Arpels, increasing, respectively, 11%, 24% and 12%. As you may recall, Donna Karan/DKNY joined us in July 2022. This explains the significant 200% growth in 2023. We anticipate that the substantial growth rate will normalize, but will remain healthy and the brand will well exceed $100 million in sales in 2024 as it continues to benefit from our expertise. Relative to our newest brands. We began shipping Lacoste fragrance in January of this year after rebooting the brand's existing fragrance portfolio and creating all new freshly…

Mr. Atwood, you may be muted. Go ahead.

I'm sorry. Thank you, Jean, and good morning, everyone. As we reported yesterday, consolidated net sales grew 6% in the final quarter, reflecting 13% and 2% growth in our U.S.-based and European-based operations, respectively. For the full year, we are pleased to have achieved record sales and earnings results. As previously disclosed, the quarterly growth rate in comparison to the full year reflects the elevated sales baseline from the preceding year. Compared to 2019, which was a much stabler year, our sales were up 85% both for the fourth quarter and the full year 2023. On a consolidated basis, gross margin expanded 30 basis points from the fourth quarter of 2022 to 64.7%, leading to a full year gross margin of 63.7%, broadly in line with the prior year, with higher selling prices and channel product mix offsetting the inflation headwinds and segment mix. In 2023, European operations gross margin eroded by 100 basis points from 68.2% to 67.2%. However, as previously disclosed, the bulk of the erosion was attributed to the inventory write-off in the second quarter. Excluding this impact, gross margins would only have eroded by 20 basis points, with pricing and regional mix almost entirely offsetting higher inflationary costs in Europe. U.S.-based operations gross margin, on the other hand, continued to expand significantly from 54.7% in 2022 to 57% in 2023. The U.S. margin expansion stems from several factors, including price increases we took early in 2023 that were not fully offset by higher costs of goods, due in part to our ongoing cost containment efforts. We also had favorable brand and channel mix as the larger portion of our higher-priced fragrances are being sold directly to retailers as opposed to third-party distributors. An example of that is what Jean explained is happening in Italy, but we're…

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

Yes, hi. Good morning. So I was just wondering if you could comment a little more, give us some color on those two regions of the world that you mentioned a little bit of lack of visibility, but Eastern Europe and the Middle East and specifically, on the Eastern Europe, I know you have been shipping some still to Russia, I think, in 2023. How much was that kind of roughly in revenue in 2023? And is that going to go down a lot in 2024? Can you just give us some more color on that? Thank you.

Yes, I can try to, good morning Linda. Yes, we see, of course, like everybody this trend in Europe. And even though the - today, we do not - doesn't have real impact on our sales, it makes us put some conservative light regarding the guidance. When it comes to Russia, for Russia it's very simple. It does not change. We ship to Russia some - the products that are made in Italy or in France. We do not ship to Russia products that are made in U.S.A. The business, Michel, in Russia is about 4% of our total sales, something like that.

Yes, it's $50 million, Linda. Yes, Linda, it's about $50 million, and that's kind of what we've - it's actually disclosed in our 10-K.

Do we expect this business to grow? No. But what we see is that the news are not great from this part of the world. And any sparks could not only stop the business that we have, the small business that we have in Russia, but it's also a tension in this region, Poland, et cetera, which represents a nice business. That's why even though business is very strong, we have no reason to reveal. I prefer to have an approach that is more conservative. When it comes to the Middle East, we do business - as you know, we have a very strong business in Saudi Arabia, in Kuwait and The Emirates, which represent, Michel, can you give a percentage?

Yes, it's about 8%. It's about 8% in Middle East and Africa represents about 8%.

I was in the region two, three weeks ago. Everybody is fine. We continue to sell. But we think that if anything happen, immediately, we'll see an impact on the region. So that's why we prefer to wait and see. But our business, for instance, on Cavalli, Roberto Cavalli, more than 50% of the business is in the Middle East. So this is to give you some color of our conservativism.

Yes. And just to build on Jean, I think the tone of caution is not relative to our business. The tone of caution is more coming from the macroeconomic environment, which we obviously don't control. But we're certainly feeling very good about the health of our brands, the level of offtake that we've had over year-end and our ability to replenish and to successfully launch our two brands. But again, we are being prudent more because of the macro environment than by any concerns we might have with our business.

We think that we will wait a couple of months before, I would say, when we release the first quarter, we will review, I hope we'll be able to review this guidance, but not now.

Okay, thanks. And then just I know, Michel, you were giving some color, I think, previously that you felt gross margin in 2024 could be flattish. And then are you still shooting also for the A&P ratio to be about that 21% target in the year? Thanks.

Yes. So, hi, Linda. Yes, Certainly, we're working towards a flat gross margin for next year with pretty much the carryover of the pricing that we took this year offsetting some of the inflationary cost that we might still expect. But broadly, I think the costs are contained and looking good for now. On the A&P, I think we've been very clear, we want to remain competitive. Some of the reasons why we've been below our 21% goal is because we continue to see a lot more market growth than potentially anticipated and that obviously has an impact on our denominator as we divide the spending by lower sales. We continue to plan more. We're gating and gating our investments so that we can land that number better. And I think I've been very clearly indicating that now for a few quarters that we're refining our ability to forecast and plan these expenses as the sales come in. So yes, you should assume that we will continue to work in that direction. There's another element that's actually quite important to keep in mind here, and it's not always very obvious, but if you compare our European operations to our U.S. operations, while the margins are roughly the same overall operating margins and have been converging. There's a big difference in our operating model, which is European operations has much higher gross margins, but also much higher A&P spending. And if you compare that to U.S. operations, it's the opposite, lower margins and lower A&P spending. As the U.S. operations becomes more and more like the European operations, you're starting to see the gross margins converging, but you can also expect to see the A&P also increasing as that business looks - starts to look more and more like the European one. That creates some segment mix both on the COGS, which was going to be favorable, but on the A&P, which will be unfavorable.

If I may add, in 2023 our operating margin was high 19%. I think it's a great level. It's higher than what it was in 2022. But one of the reasons, Linda, that we want to spend this money in advertising is that when - this advertising, we spent a lot in the fourth quarter to ensure the sell-through. And when I see that our reset and all our programs are sold through by the end of the year is really reassuring for the last year. So I think it's very important to continue to spend at this level.

Yes. Thank you. And then my final question just has to do with capital allocation and that's a nice healthy dividend increase, 20% and you've had big increases in the last few years. Quite frankly, your free cash flow in 2023 was not too much above the dividend amount. So I'm wondering like kind of are you expecting to have more robust free cash flow and a better - a bigger margin of safety. I just wonder if we should worry that your dividend is getting actually too high relative to your cash flow. Thanks.

Yes. So if you look at really what's been going on for the last couple of couple of years, right? I think we've been delivering very healthy operating profit growth. The challenge is that a lot of the - that has been consumed in free cash flow, either through the inventory and the AR build-up, which is commensurate with our growth, particularly, I would say inventory. So inventory has consumed a lot of cash. What we're seeing at this point in time is that we're getting to a level of inventory that we feel is quite comfortable. We have now, as I laid out in my prepared remarks, we have built the inventory now for Lacoste and for Cavalli. And so we are expecting going forward that a lot less of our operating profit will be consumed through an increase in inventory. And so that will definitely provide us with some good tailwinds. And then the last piece is we have made two significant investments that have consumed cash in the last couple of years. There's been the acquisition of our headquarter in Paris, and there's also the Lacoste purchase, which, as you all know, is not typical in this industry. But so overall, we're feeling very, very good about our prospects for next year and our ability to generate more free cash flow from our earnings.

Thank you. Thank you very much. That's it for me.

Thank you, Linda.

Our next question comes from Korinne Wolfmeyer with Piper Sandler. Please state your question.

Hi, good morning, and thanks for taking the questions. I'd like to touch on how you're thinking about the outlook for both the Lacoste and Cavalli licenses this year. It does seem like the guidance you laid out is factoring in maybe a little bit more conservatism and it does sound like you're being more prudent with expectations, especially with what's going on in the Middle East. But can you just provide a little bit more color on how you're thinking about the trajectory for both these licenses this year and maybe how we could - how or when or in one area could we see some upside to both of these licenses this year?

So, to answer - go ahead, Michel.

So, Korinne, hi. So right now, we are assuming in our forecast about $90 million in combination, both for Lacoste and for Cavalli for the total year. So far, we've been able to get some healthy sell-in. And so overall, that's kind of the number we're working towards. As Jean explained, the Middle East remains a pretty volatile region and half of Cavalli is pretty much going to be in the Middle East. So while we currently have about $90 million in our forecast, we're probably in our guidance assuming a slightly smaller number than that. So right now, if you look at our building blocks of the 10%, we're looking at about kind of 4% to 5% coming from the base business and then the balance coming from the new licenses. And we understand that, that's a little conservative. Right now, we do expect the market to be more around high mid-single digits, call it, around 6%. But again, we are being prudent at this point in time.

Very helpful. Thank you. And then can you just touch on kind of your longer-term expectations for A&P spend? And I know you're not guiding beyond 2024, but how should we be thinking about like the proper run rate for operating margin beyond this year if you are keeping that A&P spend heightened? And specifically, like is it reasonable to think we could get to levels delivered here in 2023 over the coming years? Or is it going to be sustainably a little bit lower due to the spend?

At this point in time, we're comfortable with the level of margins we have. I don't think we're necessarily looking to further expand. I think we've had a really, really good run. We're comfortable with the level we have. I think as the business continues to grow, we will continue to have operating efficiencies and scale gains. I think that would potentially drive a little bit of margin appreciation. But we are being very vigilant. And again, as I was explaining before, we have a lot of - there's some mix impact, segment mix impacts that can kind of throw some of these things off. If you look at our A&P right now, we're at 19.7%. But if you look at our European operations, they're at 22%. And the reason why we're lower than that is because U.S. operations is more in the 15% to 16% range. And it's the same thing on COGS. So I think what you can probably expect to see really over the long term is U.S. operations gross margins will probably continue to improve. A&P will continue to increase. And that - but overall, margins will remain roughly the same.

Okay, thank you.

Excuse me, I would like to - if we have time, I would like to go back to this interesting point of like Lacoste and Cavalli, which are the two new license that just started, we took them over January 1. I think we're going to see some good surprise on both because the former licensee didn't put a lot of inventory in the market. And there is from the orders that we are receiving in the first quarter, we see that there is large appetite for Lacoste products and also for Cavalli from the trips that I make, we see empty shelf, and we have to replenish the shelf quickly. So there is - if it continues at the level that we are seeing now, we have a lot of chance to make the bigger numbers than that for Cavalli and for Lacoste for this year.

Thank you. And our next question comes from Ashley Helgans with Jefferies. Please state your question.

Hi, this is Sydney for Ashley. I was just wondering if you can talk a little bit about what you're seeing in terms of consumer price sensitivity and maybe also sensitivity to promotion. And then any kind of color you can give in terms of what you're expecting for the broader fragrance category, promotional environment looking out through 2024?

Well, I can try to answer. But as I said before, we have seen a premiumization in the market for sure. There is - there are more and more consumer willing to spend more for higher quality fragrance. When I say higher quality, meaning more concentrated fragrance. So instead of buying Eau de Toilette, they will buy Eau de Parfum. So it could be more expensive. We see no real price resistance when it comes to fragrance. We see also worldwide more people buying larger size, which is also a sign. Our fragrance come usually in three sizes, let's call it, small, medium and large. More than 50% of the sales are in the large size. So this, of course, helps the business. It has not always been like that so - and we see this trend continue. We see it in a brick-and-mortar business and of course, in the very important e-commerce business. Michel, you have something to add?

Yes. No, I think I would say the market has been generally very strong. So even if there is - if there were to be any price elasticity related to pricing, we're certainly not seeing it or there's a very strong underlying trend that's kind of pushing the market up that would be offsetting that. And on the promotion side, we're not really seeing any significant increases in the promotional levels, typically holiday where you get your normal gift sets. There are some various events throughout the holiday season to facilitate sell-through, but we haven't really seen any significant increases in promotional activity either.

Got it. That's helpful. And then just one more from us was any updates you can kind of give us on the travel retail channel and what you're seeing there?

Yes, travel retail is really back. We have all the operators, the largest operators and there is less than a dozen of them going back very strong with a lot of programs at a higher price and in Europe, in the U.S. and in Asia except China, we will see a nice increase in our travel retail.

Got it, thank you so much.

Thank you. And our next question comes from Hamed Khorsand with BWS Financial. Please state your question.

Hi. Good morning or good afternoon, Jean. The first thing I wanted to ask you is are you seeing any difference? Can you hear me?

Yes.

Yes.

Are you seeing any difference in your relationship with the retailers and what's going on with you going direct and how beneficial that is for you? Are they buying more because you're having - establishing relationship? How is it different?

I am not sure. Michel?

So let me try to take that, and then, Jean, you can maybe fill in. I mean, obviously, there's always a benefit in going direct because if you go direct, you can obviously pick up a piece of the overall value that is out there. If you can do it, obviously, efficiently. The second benefit that you get is effectively you're closer to the business, you're closer to the pulse of the business. When you're selling through a distributor, you don't necessarily have as much visibility on what the retailers are doing. Obviously, you have ongoing conversations with your distributor, you stock - you track stock in trade, you track their stock levels, you look at offtake. But when you're one step closer to that consumer to that retailer, it definitely helps the relationship. You also are the one talking about your brands. And obviously, we always know how to talk about our brands, even if partners are also very well trained. We definitely are one step closer as well. So I think all of that just creates positive momentum and inevitably kind of helps us.

Okay.

We have direct relationship with retailers in many countries. And of course, we can respond much more faster when you have a distributor in the middle for sure.

Okay. And then have you changed up any of your time line for new releases this year? Or are you staying put?

Yes. I think there was some - if you really look at the business overall, typically, what you see is from a seasonality standpoint, I mean a lot of - if you look at a stable FMCG business, it's pretty much everybody's buying every quarter, roughly a quarter, a quarter, a quarter. What you see on the fragrance business, it's much more skewed to the second half of the year. And if you look at what we did this year, this year, we are about roughly - 47% of our business was in the first half and 53% was in the second half. Normally, it's more like a 46-54 split, and this year was a bit of an outlier because we had a very, very strong Q1 last year with a lot of innovation, particularly on Mambo and Jimmy Choo. So this is one of the reasons why we're guiding to a slightly slower growth relative to last year. It's more driven by seasonality of this market and this industry, which was a little bit off last year versus what we normally see.

Okay, thank you.

Thank you.

Thank you. And there are no further questions at this time. I'll turn the floor back over to Michel Atwood for closing remarks.

Okay. Well, thank you really all for joining our call today. Really before I end the call, I wanted to take this opportunity to really thank our teams. They're really the unsung heroes here. They're not on this call, but they're all behind us. For those that have been following us for a while, I think you've all seen the pace of growth and transformation over the last few years. It's been really considerable, and we could not have achieved this not only achieved and sustained these record results without all of their hard work and dedication. So really, again, I wanted to really thank our teams today to all of you. Last thing I would like to do is just also maybe announce some upcoming events. So first, Jean, I will be joining the D.A. Davidson's inaugural Best of the Breed Bison virtual conferences on March 8. And separately Jean will also be attending the Raymond James Beauty Leaders Dinner in London on March 19th. So please reach out to the respective sales representatives if you're interested in partaking in these events. Obviously, if you have any additional questions, you can contact Karin Daly from the Equity Group, our Investor Relations representative. Our telephone number and email address can be found in our most recent earnings release. And obviously, I'm always available as well to answer any questions. We look forward to the next conference call. And really wanted to thank you again, and wish you all a great day.

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