Greetings and welcome to Inter Parfums Fourth Quarter 2018 Conference Call. 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.

I would now like to turn the call over to Russell Greenberg, Executive Vice President and Chief Financial Officer of Inter Parfums. Mr. Greenberg, you may begin..

Thank you, Dana. Good morning, and welcome to our 2018 fourth quarter and full year conference call. We will follow a regular format today as I will start the call with a discussion of our financial results and then Jean Madar, our Chairman and CEO, will provide an overview of our business, and share some of our plans for the future.

And then, we will take your questions. Before proceeding further, I just want to remind listeners 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 include but are not limited to the risks and uncertainties discussed under the heading Forward-Looking Statements and Risk Factors in our Annual Report on Form 10-K and the 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.

When we refer to our European based operations, we are primarily talking about sales of prestige fragrance products, conducted through our 73% owned French subsidiary Interparfums SA.

When we discuss our United States operations, we are primarily referring to sales of prestige fragrance products conducted through our wholly-owned domestic subsidiaries. Summarizing our better-than-expected fourth quarter performance, net sales were $177.2 million, up 18.5% from $149.5 million.

At comparable foreign currency exchange rates, net sales increased 21.2%. Net sales by European based operations rose 16.8% to $134.8 million from $115.4 million. Net sales by U.S.-based operations were $42.4 million, up 24.4% compared to $34.1 million. Gross margin was 66.1% for both periods.

SG&A expenses as a percentage of net sales were 60.1% compared to 61.4%. Operating income was $10.6 million, up 120% as compared to $4.8 million. Net income attributable to Inter Parfums, Inc. increased 82.9% to $8 million compared to $4.4 million. And finally, net income attributable to Inter Parfums, Inc.

per diluted share rose 85.7% to $0.26 from $0.14. Thus, for the year as a whole, net sales increased 14.3% to a record $675.6 million as compared to $591.3 million in 2017. At comparable foreign currency exchange rates, net sales increased 12.8%. Net income attributable to Inter Parfums, Inc. increased 29.3% to $53.8 million from 2017's $41.6 million.

And net income attributable to Inter Parfums, Inc. per diluted share rose 28.6% to $1.71 from $1.33 per diluted share in 2017. Most of my financial discussion will be focused on the year as a whole, but a few fourth quarter items are worth noting.

It helps to know that in the final quarter of 2018 the average dollar-euro exchange rate was 1.14 versus 1.17, resulting in a slight benefit to gross margin for our European operations. In addition, income from operations in the fourth quarter of 2017 included a $2.1 million impairment charge relating to our legacy mass-market business.

Since I'm sure you’ve all spent the weekend reviewing our 2018 annual report on Form 10-K, you know that there is more to be gained by looking at our business on an annual basis rather than by an isolated quarter.

We've already discussed the contributions to our gross sales in our press release, but I do want to highlight two 2018 game-changer brands for us. The first, which is part of our European based operations is Coach, a brand which has gone from zero to close to $100 million since 2016 when our first Coach scent was launched.

The second brand is GUESS, the addition of GUESS legacy scents beginning in April 2018 has been a major contributor to the increase in 2018 sales.

Another point worth emphasizing is our European based product sales were meaningfully ahead of last year, not because of a major blockbuster launch, but rather on the basis of continued sales of established scents along with the introduction of several flankers and brand extensions.

Moving on to profitability inputs, gross margin for our European operations was 66.3% in 2018 and 67.1% in 2017. The average dollar-euro exchange rate was 1.18 for the full year in 2018 as compared to 1.13 for the full year in 2017. With that weaker dollar accounting for the small fluctuation in gross margin. For U.S.

operations, gross margin was 51.4% in 2018, up more than 200 basis points from 49.3% in 2017 with the improvement primarily resulting from increased sales of higher margin prestige products under license. There isn't much to talk about in the SG&A arena, except to say that these expenses accounted for 49.3% of net sales in 2018 and 50% in 2017.

Since 2017, we have earmarked 21% of net sales as our aggregate annual promotion and advertising expenditure target. Such expenses aggregated 20.7% in 2018 as compared to 20.9% in 2017.

With regard to non-operating items that influenced the bottom line, we benefited from the reduction in the corporate tax rate in the United States and to a lesser extent in France. In 2018, our effective tax rate was 27.3% as compared to 29.2% in 2017. Our financial position remains extremely strong.

At year-end, working capital aggregated $382 million and we had a working capital ratio of over 3 to 1. Cash and cash equivalents and short-term investments aggregated $261 million. Long-term debt including the current portion aggregated $46.1 million.

With the benefit of greater visibility since we issued our initial expectations for 2019, we have raised our guidance and now look for net sale of 112 million, resulting in net income attributable to Inter Parfums, Inc. per diluted share of $1.85. As always, guidance for 2019 assumes the dollar will remain at current levels. Jean, please continue..

Thank you, Russ, and good afternoon to all of you. Before moving on to business, I want to acknowledge with sadness the recent passing of Karl Lagerfeld, the giant in the fashion industry whose name we have licensed since October 2012.

We will continue to honor his memory with fragrance that evoke his unique stature and elegance among the world's leading designers. And now, onto business.

2018 was a great year for our Company by continuing to support our portfolio of brands with product and promotion, adding new brands to our roster and expanding our distribution geographically, both in brick-and-mortar stores, as well as through e-commerce.

Our sales and profits set records and we further enhanced our reputation within our industry and among potential partners. As we reported, we achieved sales growth in all the regions in which we operate.

The fourth quarter was especially strong in our three largest markets, culminating in year-over-year sales growth in North America, Western Europe and Asia. For North America, it was up 19%; Western Europe, 9%; and Asia 24%. We also made gains in the Middle East and Eastern Europe with sales up 17% for the Middle East and 7% for Eastern Europe.

In addition to growth, we continued to achieve exceptional productivity. With only 300 employees, we attained $675 million in sales, which equates 2,250,000 -- 2.2 million per employee.

As we prepare for our approach to the $1 billion sales mark, we have established several new posts, met some critical new hires, and elevated several exceptional individuals to positions of greater responsibility. We are now in a far better position to support the growth we anticipate in the coming years.

Before, I proceed with the highlights of our new product launch schedule, I want to share some thoughts on the importance of brand extensions. In our business, we call it flankers, since they play a critical role in our business.

No doubt blockbuster, mega brand, global launches are huge sales catalysts but flankers and brand extensions generally keep both fragrance relevant and trends over time. It is also less expensive and easier to launch the flanker in a world where a perfume bottle can take up to two years and many hundreds of thousands of dollars to design and produce.

Flankers have similar bottles and caps as the original, different fragrance, of course, and that goes for the packaging and the better graphic [ph] as well. As a rule, there is less risk associated with doubling down on the successful fragrance rather than starting from scratch on a new formula, which may or may not be successful.

Flankers also give us the opportunity to revive the once popular brand. So, now, we move on to the new product launches in the pipeline, and we have many, with a focus on our largest brand. Montblanc in January initiated the global rollout of Explorer, our new fragrance, which should energize brand sales in 2019.

The first results are way above our expectations. Later in the year, we have a new men's line debuting for the Jimmy Choo brand, along with newer interpretations of Jimmy Choo Blossom, Illicit and L'eau.

In 2020, we will be looking to expand the brand into beauty with lipsticks and nail polish at the high retail price, plus an entirely new women’s fragrance franchise. So, for Coach, we are relying on established scents and the second floral flanker to sustain brand sales in 2019 as we prepare for major women's fragrance launch in 2020.

For Lanvin, we launched a new fragrance for women, called A Girl in Capri, and which will debut in the summer. For Rochas, we've got the Moustache line rolling out, the first men’s scent developed by us since we acquired the brand. We will also have our third interpretation of Rochas Mousseline.

We may also unveil an entirely new Rochas women scents late in the year, but it could fall into early 2020, which is when we plan to introduce our second new men's fragrance of the brand. I'm also pleased to report that Rochas fragrances are being sold in about 20 countries today.

Historically distribution was for the most part limited to the France and Spain. With regard to the U.S., for GUESS, we will further expand existing pillars, starting with 1981 Los Angeles where domestic distribution will begin in the spring followed by international rollout in this fall.

Then, later in the year, September, October, we introduce a new product called Seductive Noir, a brand extension. The domestic fallout will start in September and international distribution coming the year after. But for 2020, we are developing a new blockbuster women’s scent for the GUESS brand with a very upscale designer cache.

For Anna Sui, we have a new addition in 2019 after following the great success of Fantasia that we launched in 2019, and next month, a flanker, called Fantasia Mermaid will debut. Anna Sui fragrances are concentrated throughout Asia but she also has a strong following in the UK as do our fragrance.

In 2020, the Anna Sui brand has a major launch planned for a new fragrance family, called Skies. [Ph] For Dunhill, we have an exclusive with Harrah's [ph] in London for the new Signature collection starting in April and running through yearend. This will be followed by a global rollout next year.

And for other Abercrombie & Fitch, we are launching as we speak a new duo called Authentic. We are launching in the UK first and global distribution will follow a month after. Let me bring you up to date on our newest brands, Graff and Lily Aldridge. With regards to Graff, we are going to create six sense for our debut collection.

It now looks like early 2020 or very late 2019, this is our revised timetable for launch. We are also in discussions with premier hotel about supplying exquisite Graff travel amenities and with airlines for the first class customers’ givebacks.

And finally, the Lily Aldridge program is moving forward with four scents, each associated with important geographic markets in the supermodel’s life. Our time table anticipates the first Lily scent to debut in September, the second in November of this year and then the remaining two in early 2020.

So, now, operator, we can open the floor for questions..

[Operator Instructions] Our first question comes from the line of Linda Bolton Weiser with D.A. Davidson. Please proceed with your question..

Hi. So, can I just ask you a little bit about the gross margin? I guess, it was a little less than we had thought and I guess it was sort of flat year-over-year and yet the currency was -- the comparison was even more negative, i.e. weak euro.

So, wouldn’t that have helped your gross margin? I think, you said it did in the European segment, but I'm just wondering why it didn’t affect the whole gross margin more. So, maybe you could touch on the U.S. gross margin.

I'm just trying to figure out why the gross margin wasn’t sort of up more year-over-year?.

This is a question for Russ..

Well, as I indicated, the exchange rate for the full year was 1.18 as compared -- to in 2018, as compared to 1.13, reflecting a slightly weaker dollar and that normally would have a negative effect on gross margin. However, also for the quarter, it actually flipped the other direction where the exchange rate was actually a little bit positive.

The real key though overall is that the negative effect from the currency exchange rate was mitigated due to the significant increase on the U.S. side of our business. The U.S. side saw gross margin come in at 51.4% in 2018 and that's up from 49.3% in 2017.

And that increase in margin was primarily related to more products that are sold under -- prestige type products sold under license, which is the direction that our European -- that our U.S. business is moving. So, the counter-effects of each of those is really where we ended up.

Overall, on a companywide basis, you have a very small decline in gross margin from 63.6, down to 63.3..

And I would like to add that in the U.S., we'll continue to improve our gross margin for 2019 by at least 100, maybe 200 basis points.

Do you agree, Russ?.

Yes. That should improve exactly by almost 200 basis points this year. And I think that that will continue, again, as we move towards more sales of the higher margin prestige products..

Okay. Thank you. That's helpful. Can I also ask you -- can ask, you mentioned a $1 billion in sales as I guess a goal. I guess, that's the first time I heard you say that.

What kind of timeframe are you thinking you can get to a $1 billion?.

I knew you were going to ask that. Look, we have today -- when you look at the portfolio, we have now three brands that are close to -- that are $100 million brand. We think that GUESS has the potential in two to three years from now to be a $100 million brand. So, it's a goal.

I don't know if it's going to be three years from now, four years from now but this is the timeframe that I will put..

And can I also ask? Your comments about Montblanc Explorer, I think you said already doing better than expected.

So, is it possible, the first quarter revenue could be up double-digit year over year, is that possible?.

I don't know if we can comment, but what we can say, we are already two months into the first quarter. And we could look at a very, very strong first quarter of 2019..

Yes. The only thing I would add to that, last year's first quarter was up about 20%. Let's keep in mind that the guidance implies an increase of between 5% and 6%. Could Q1 be a little bit better, Q1 was one of the highest growing quarters we had in 2018. So, yes, I think, it's going to get pretty close to that double-digit.

Whether or not we'll exceed it, that we don't know yet. But with the launch of Explorer and with the fact that in the first quarter last year we didn’t have any sales for GUESS, we think we could have -- we could look at the very strong first and second quarter..

Our next question comes from the line of Joe Altobello with Raymond James. Please proceed with your question..

I just want to go back to the guidance and the guidance revision this early in the year, it sounds like January and February were pretty strong.

So just curious, did you see broad-based strength? Was it based on new launches, like the Montblanc Explorer brand, was it particularly geographies that were strong? So, just trying to get a little more insight into what you saw in the first two months of the year that gave you a more confidence for the full-year outlook?.

I'll start, Joe. I think it's a combination of a few different things. First of all, we also ended the year 2018 on a very, very strong note. The market for our products has been and continues to be very strong. So, that also played a little bit into our decision to raise the guidance.

But clearly, the results that we’re seeing and the initial results that we’re seeing on what will be probably one of the year's biggest launches, which is the Montblanc launch, that is also playing a significant role, as far as why we decided to increase the guidance so early on in the year..

Okay, that’s helpful. And then, maybe secondly….

If I may, Joe. I will add that we gave this guidance in November I guess, the first guidance, but then we see a sell-through stores. And we traveled, the whole Company traveled a lot December and January, and what we see that the inventory at distributor level and at store level is quite low.

We have large request of -- we have large purchasing from our distributors in January and February. So, we are much more confident, and that's why we are increasing slowly because we have to stay conservative. We have to -- that's why we increased the guidance. But in general, Asia is in a very good shape.

I know that a lot of analysts are looking at Asia with little nervous but we are not nervous at all. we checked however ourselves by stores and we are in a very good position. We will continue to grow double-digit in Asia.

Our sales in Europe also are looking great because of the launch of Montblanc Explorer, which will be the third franchise for Montblanc. So, honestly, it was completely normal to raise the guidance..

Okay, understand. Thank you. And then, maybe two quick follow-ups for Russ. One, what's the tax rate you guys are assuming for ‘19? I see it bounced around a lot in ‘18. And then, secondly, it looks like your expense jumped up from 3Q to 4Q.

What caused that and what should we expect for ‘19?.

With respect to the tax rate, there really wasn't too much that was unusual, as far as the tax rate going into 2018. So, I think that the number that we have in 2018 should probably be fairly consistent with what we would expect in the future. And once again, in case you missed it, the effective exchange rate came in at around 27.3%.

From an interest standpoint, interest rates have been rising little by little throughout the year. We do have a significant amount of cash and cash equivalents and short-term investments on our balance sheet. We have been able to see a greater return on some of that cash. And that’s really -- I don’t think it’s anything that’s all that significant.

But for the full year, the interest line was up overall about $1 million..

Our next question comes from the line of Steph Wissink with Jefferies. Please proceed with your question..

A follow-up question just on the lifecycle of your core launches. We saw Montblanc continued to grow without any major launches in 2018.

I'm curious if you can just talk a little bit about the lifecycle of both core brands, and if you are continuing to see strength in some of the underlying product launches from prior years?.

The very good news is that we do not see any cannibalization in the launches of the new lines. It means that we were able to grow. We had a great year in 2018 without any major block buster launch. It means that our products are reaching and are taking market share.

And the new lines, specifically the new Montblanc, we do not think that the positioning of the new Montblanc will have an impact -- negative impact on the existing business of Montblanc.

So, as I said many times, we are very careful in our -- when we launch products in our portfolio to make sure that we do not replace sales that we continue to build on. And it’s the case on Montblanc; it’s the case on the Rochas; it’s the case on the Coach.

We just launched Coach Floral, which is an extension, what we call a flanker, and it’s adding to the total business, it’s not replacing. So, these are very, very positive signs for us..

And Russ, if I could, one for you, just on the SG&A. You had some nice leverage, both on the quarter and the year. I'm wondering if you could talk a little bit what you are seeing with the selling expense in particular.

Is there an element of marketing efficiency that you are starting to find with some of either your core launches some of your flankers?.

Overall, -- again, I think we’ve been pretty open and transparent and also very consistent with respect to the A&P spend, which is probably the single biggest line within that SG&A. As mentioned in the opening remarks, we targeted 21% as an A&P target for both 2017 and ‘18, we came in almost exactly where we expected.

Even though sales were a little bit greater than expected towards the end of 2018. All that really means is that we are going to continue to add dollars to that add spend to keep up momentum going. That’s been a game plan that Inter Parfums has started from many, many, many years.

Other items within the SG&A, we’ve gotten to the point that we finally reached the operating margins that we were really targeting for. This year, we ended up at around 14%. Our next goal of course is to see if we can expand it to perhaps 15%. I can't pin a target date on it. But, that is going to be a goal of ours as we continue to grow our top line..

[Operator Instructions] Our next question comes from the line of Hamed Khorsand with BWS Financial. Please proceed with your question..

Hi. So, first off, I just want to ask you about this Montblanc Explorer.

Is that cannibalizing any of your built in consumer activity because it's a higher priced item or is this brand new demand that you're seeing?.

As I said before, there is no cannibalization at all. We're reaching I would say a different consumer. We are -- this is a major launch for us. Montblanc didn’t have a new fragrance for two years now. So, it has been expected in the market.

The good news is that the distribution is giving us -- the trade is giving us a lot of space, and either in Europe or in the U.S. or in the Middle East, which I'm traveling right now, we are seeing some great numbers. We just got some reports from Duty Free, which are much higher than expected.

So, we think that the product is at the right price point, it's an elevated product and it has all the cache of Montblanc. So, we waited -- we could have launched this product in the very end of 2019 but we thought it was better to wait -- 2018, I am sorry. We thought it was better to wait for first quarter.

And so, like this we'll have the full year this year.

Russ, do you want to add something?.

No, I think you hit it. One of the main things that Inter Parfums tries to do when we create new product for each of the brands that we have and that is to try to attract new consumers to the brand.

We study the brand, we look to see what the brand is doing from the standpoint of their other key products that they sell and try to capture the potential new customers to that brand. And I think that is really what bodes well for the success and the minimal cannibalization that we're expecting..

And then, Russ, I know you touched on this earlier. But, as far as the initial guidance was concerned and you guys were highlighting that there is several new launches going on.

What drove that conservatism, what were you thinking was not going to happen that's starting to happen now as far as the demand uptick? Is it just because distribution, inventory level is low or is there something else driving this?.

I don't think, there's anything in particular that's driving it. Inter Parfums is always and has always been and will always continue to be relatively conservative with respect to our guidance. There are a lot of variables in connection with this, the exchange rate is being one.

We are coming off a year that was a very, very successful year with new license activity, adding to the top line growth that we had in 2018. So, looking at the business as a whole, we felt very comfortable with the initial guidance that we've given. And today, we think the business is stronger.

And, therefore, we have raised our guidance to the extent that we deem necessary. And we will continue to monitor those variables. And if need be, we will continue to raise our guidance in the future. But, I don't think there's any individual input that is making the decision for us.

It's really a combination of looking at the environment, looking at the business, and looking at the times..

Okay.

And then, finally, given the scope of all these new product release and your revenue increasing, are you guys going to stay on target of 21% as far as the advertising spend or could it decline, even though the dollar amount is increasing?.

I think, it's very important to spend these kind of dollars. This is insurance for the future. We need to spend money to keep our sales growing, to try to get new customers, to improve our market share. So, this 21% is definitely the right number. We do not want to decrease it in order to show more profit.

We will show more profit if we sell more, not if we decrease our advertising budget..

Yes. I will also just add that that number is up from what was 17%, 18% just a few years ago. So, we have increased it. And I tend to agree with Jean that it’s now at a level where it needs to be. And I don’t see us decreasing it at all; increasing it, we’ll have to evaluate that as we continue to evaluate the market.

But, at this time, I think, the 21% is pretty solid, moving into 2019..

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Russell Greenberg for closing remarks..

Thank you, again, Dana. Before signing off, I would just like you to know that on May 14th, I will be presenting at the Citi Consumer Staples Access Day in New York. And on May 30th, I will be at the D.A. Davidson Consumer Conference in Chicago. And then, on June 18th, I will be at the Jeffries Consumer Conference in Nantucket.

Thank you all for tuning into our conference call. And as always, if you have further questions, please contact my office. Have a great day. Thank you very much..

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation..