Greetings. And welcome to the Inter Parfums First Quarter 2020 Conference Call. [Operator Instructions] A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note that this conference is being recorded. I will now turn the conference call over to Russell Greenberg, Executive Vice President and Chief Financial Officer of Inter Parfums. Thank you, Mr. Greenberg. You may begin.

Thank you, operator. Good morning and welcome to our 2020 first quarter conference call. It is obviously not business as usual. What has happened since our last conference call on March 3 has been unlike anything any of us have ever experienced or even imagined. We see no need for me to read out the first quarter comparisons that were in the release we issued yesterday afternoon. I will devote my discussion to explanations of those results and to the balance sheet and cash flow items. John will then bring you up-to-date on how our business is faring through the COVID-19 pandemic, where we see bright spots and opportunities, where we see weaknesses and key aspects of our plan of action. As usual, however, I must read the following. This conference call may contain forward-looking statements, which involve known and unknown risks, uncertainties and other factors that may cause actual results to be materially different from projected results. These factors include, but are not limited to the risks and uncertainties discussed under the headings Forward-Looking Statements and Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2019, the quarterly report on Form 10-Q for the first quarter ended March 31, 2020, and other 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. One more recurring message, 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 U.S. based operations, we are primarily referring to sales of Prestige Fragrance products conducted through our wholly owned domestic subsidiaries. Our consolidated first quarter gross margin of 61.5% of net sales was just…

Yes. Thank you, Russ. And good morning, everyone. Well, I won't repeat most of the points we raised in our release and Form 10-Q filed yesterday. I do think that the exceptional performance of Coach Dreams and GUESS legacy products are worthy of a special mention. I also think that there is value in pointing out certain fundamentals of our business model, which distinguish Inter Parfums from some of its peers and immunize us against some of the harshest effects of this pandemic. Let's look at them. Firstly, we are not capital intensive. We don't own factories. We don't operate stores. Our 2020 CapEx budget is only $4 million. We have 400 full-time employees worldwide, not thousands, and approximately two-third of our expenses are variable and our near term fixed expense should come in at under $25 million per quarter. So we have always maintained an exceptionally strong balance sheet. So we don't need to raise money, not hire more people at present nor in the future to grow our business. While we have instituted a hiring freeze, we have not furloughed, not discharged our employees, and although, we have not cut any salaries, we have notified our staff that we will eliminate 2020 bonuses. Moving on to our market, as noted in the first quarter, the impact of COVID-19 was most severe in the Middle East and Asia, where net sales declined for us 44% in the Middle East and 37% in Asia, respectively, for the first quarter. In North America and Western Europe, where shelter-in-place and store closings were implemented later in the period, first quarter net sales declined 21% in North America and 11% in Western Europe. Towards the end of March and into April 2020, northern part of Asia have reopened, with China taking the lead…

Thank you. Ladies and gentlemen, at this time, we will conduct our question-and-answer session. [Operator Instructions] Our first question comes from Joe Altobello with Raymond James. Please state your question.

Hi. Just wanted to start in terms of Asia in particular, in Northern Asia, where you're starting to see markets open up, you mentioned Korea, China for example. Curious what trends you're seeing in April in brick-and-mortar retail in these two markets? Are -- is traffic starting to come back? Is it starting to get -- is it up year-over-year or is it just up sequentially from where it was in February, let's call it?

Okay. This is something that I follow carefully. Traffic in brick-and-mortar stores are down this year comparing to last year. Even in the month of April, the traffic is down. But I expect something like 60%. But our business was up because of e-comm and the fragrance -- the part of e-comm in China for instance for fragrance is today much bigger than the brick-and-mortar stores. So we will see -- I think we'll continue to see sales up in e-commerce, which will balance the fact that the traffic and the sales at brick-and-mortar stores are down.

Exactly. That's very helpful. Thank you.

If you want I can add because I'm following this on a weekly basis, I get reports. What -- China is the big, big animal that everybody is looking at. Of course, Korea is a very important market. And because there is no travel, all the very strong duty-free business that we have in Korea especially serving Chinese customers traveling is absolutely down to zero. When it is going to reopen, this is a big question mark. But -- what else can I tell you? Japan stores are closed. So that's what I can tell you for now for Asia. But I can -- if you want me -- if you have other questions I can give you more precise indications by countries in Europe, etc, but if you need I'm available.

No. Absolutely. That's helpful. I just wanted to follow-up with that, you mentioned, travel retail, obviously, significantly impacted for the foreseeable future. I'm seeing a little bit of an uptick or significant uptick in e-commerce. If you could size for us last year how big travel retail was from a sales and earnings perspective? And how big e-commerce was for you guys?

Let's talk about the duty-free business. I have to tell you that we have reduced drastically our projections for the travel retail. At the end of the year, I expect this business to represent maybe 5% to 7% of our business, where last year it was, I would say, almost 20%, Russell last year in travel retail.

Yes. It's between 15% and 20%, absolutely.

Okay. So, this is really where we're going to feel the most painful effect because all airports are -- I mean, all airport operators of duty-frees are closed. We think the traffic is going to be way down. We think also -- and there is also a problem of exposure of receivables with operators that have not paid deals yet. So you don't want to give to -- to give them more credit. So really the travel retail for Inter Parfums is maybe the most affected -- will be the most affected part of the business. The other territories, Europe, U.S. will start recouping, we think in our projections we have starting the month of June, July, and August. We have, as Russ said, we have maintained a good amount of inventory, a higher amount of inventory that we needed for the sales that we will have this year. But in case the market rebounded faster than we expect we will have invent -- immediate inventory to respond.

And in terms of e-comm as a percentage of revenue?

Russ, do you want to answer on the e-comm?

Yes. E-comm, Joe, as I usually say, is a little bit more difficult to quantify because of the fact that many of our brick-and-mortar customers also have an e-comm section and where we get some indications, but we don't know precisely how much of their business is actually done through e-comm. In China and in Asia, it's a little bit different because, Jean, I think, what is it close to 70% of the sales in China are through e-comm?

Yes. Yes, where if you put together the macys.com, sephora.com, ulta.com, all these third-parties e-comm for us. It's less than 5% of our business today.

Thank you. Our next question comes from Linda Bolton-Weiser with DA Davidson. Please state your question.

So in terms of your comment about fixed costs being less than $25 million per quarter, is that on the SG&A line alone or is that including some costs that are in COGS as well? And can you comment on how permanent those reductions would be? I mean, obviously, the bonus reduction would come back later. But can you just comment on sort of if any of this would be more permanent?

Well, the -- first of all, there is a little bit in COGS, but it's almost inconsequential. The only thing that's in COGS that is a fixed expense is your amortization and depreciation on tooling for the -- for molds that we create for bottles, caps and collars and things of that sort. So most of what we're talking about with respect to this $25 million is in the SG&A. And where we came up with the number is really we are looking at it as to what we expect in the near-term. What we've done with respect to the fixed costs. As Jean mentioned, we did not furlough any employees. We only have 400 people. We did -- it took us a long time to build the team that we have. The last thing we really want to do is to lose some of the great talent that we have. Once this pandemic is over, we really do expect things to get somewhat back to normal and we would want to have this great team that we have. So it's a -- less than $25 million is a short-term number of what we're expecting over at least the next two, three quarters as we move through this pandemic.

And then, you commented on, like a down 50% number for retail store traffic. So would it be safe to say that the second quarter revenue is going to be down at least 50%? I mean, when you take into account all the travel retail decline and everything, is that kind of the magnitude that you're looking at maybe for the second quarter?

As Jean mentioned, the 50%, I -- and Jean, correct me if I'm wrong because I don't want to put words in your mouth. I think you were talking about the brick-and-mortar retail in China.

Absolutely.

Right.

Brick and retail mortar in China, where -- when the stores are opened it was down 50%. But let's not forget that in the month of April all the stores, besides China, all the stores worldwide were closed. So I'm not talking about 50%, we're talking about 100% and we did not -- we're not going to give -- we decided not to give guidance. But let's realize that in the U.S. for instance, there was -- we didn't sell any products in the month of April. And this is because all the stores, all our customers were closed. Again this was in our projections, when we redid our projections in March for the rest of the year, we didn't expect sales in April, it is going to be a little bit better in May. Already we think that June will be of course, better, so it's going to be a quarter of -- a very unusual quarter and –

Yes. And we can't make any projections, because the visibility really isn't there. Not only do we not know when different states within the United States might open, but certain countries around or other countries around the world. And then you also don't know what the acceptance rate of these stores opening is going to be. And that's the reason we don't have the ability, we don't have the visibility to actually put out any projections. But, honestly, in the second quarter, we expect that to be the worst quarter clearly without a doubt.

Thank you. That's helpful. And then, can I just ask you in terms of the cutting of the dividend, what KPIs or metrics or financial numbers or what would trigger your thoughts to bring back the dividend? Like, what kind of conditions would you want to see the business in to bring back the dividend?

Honestly, it's a very good question because I ask myself this question, because as you know me and Philippe, my partner, we receive 45% to 50% of the dividend. So when do we think that it will be time to go to -- to go back to dividend? It's important to have better visibility to -- for 2021. So when I think the company will be -- will have a better feeling of how 2021 is going to be, when we are going to be back to normal comparison of sales, normal type of profit, we will definitely go back to the dividend. Again, the dividend was not too much a cash flow thing because when we have I think $200 million, and again, but we think that it was not right to -- it was better to hold it. Again, if we are too conservative. If we -- if business come back faster than what we think it's very easy to reactivate the dividend. Russ, you want to comment on that.

Yes. I mean the only thing I would add is that, when the Board met to discuss a lot of it what really went around the cash flow issue. And as soon as we have things get back somewhat where we can -- where we have the visibility we need and our projections show that we have a positive cash flow, I think the company will revisit the dividend.

Thank you. Our next question comes from Wendy Nicholson with Citigroup. Please state your question.

Hi. Good morning. A couple of questions. First, just following up the online business because it's all going through third-parties and you don't have to manage any of the fulfillment yourself. Is it fair to say that the margin of online sales is neutral to traditional brick-and-mortar sales, no advantage or disadvantage for you, is that right?

Absolutely, absolutely.

Okay. Second thing, yesterday –

Totally neutral.

Totally neutral. Okay. On their call yesterday, Coty talked about some customers and I -- they didn't call out which customers, which class of trade, but some customers in the beauty space were having trouble paying their bills and so receivables have gone up for the quarter. And I'm wondering if you have any issues, I know you said, you don't have any liquidity issues, but Russ, are you have any -- having any challenges on the receivable side?

We are working very closely with pretty much all of our customers because everybody is trying to push things out as much as they can due to the -- due to their own cash flow issues. The only area though where we have seen a little bit of a collection issue, as Jean mentioned, is in the travel retail. Some of this duty -- some of the duty-free operators in the airlines are suffering significantly, their doors are completely closed and we're getting some pushback on some collection efforts. But, honestly, for the most part, we are working very closely with all of our customers, some of them are on payment plans. There are a couple of retailers that, of course, are sketchy with respect to the possibility of bankruptcy, but none of the major customers that we deal with have filed bankruptcy at this time.

Got it. Okay.

And I'd like to add, if I may –

Yes.

I would like to add that either from our operations in Paris or in New York, most -- 99% of our receivables are covered by insurance. So we have -- we -- like Russ had said, we see maybe some weakness with one or two travel retail operators but the risk is in hundreds of thousands maximum –

Yes, certainly. Absolutely, yes.

Yes. Yes. So we have absolutely not increased our reserves for bad debt or things like that, but it's true that all our teams in Europe, in the U.S. in Asia are helping the finance department to collect and I think it's -- we're doing quite well because the collection rate is actually better than -- a little bit better than expected, let's put it this way.

Got it. That's great. My last question and thank you so much for letting me ask a couple, is on the push out of your new products, which makes total sense, the new launches. I guess the question is, is there inventory sitting there? Do you have bottles of perfume that you thought you'd be shipping that now you're not, is there any risk of sort of inventory obsolescence or any consideration there in terms of impact of those delayed launches? Thanks.

Yes. Thank you. It's a very good question because this is also something where the whole company spent a tremendous amount of time. So number one, the good news is that with fragrance, with perfume, we don't have issues with seasons, with size, with colors, as opposed to garments for instance. So the product that I'm producing today, it will be the same six months and one year and it is the same than the one I produced three years ago. So, yes, we have definitely little bit more inventory than we would like. But, again, as we review on a monthly or quarterly our inventory, we have not increased at all the reserve for obsolescence due to having more inventories than that is necessitated by the situation. Russ, you want to add something?

Yes. The only thing, I would say, just on your last comment is that, in our industry because of the fact that you don't really have an issue with respect to longevity, it's very rare to actually have a write-down with respect to finished product. Even if you discontinue something, you can always find a market where you're going to sell it, where you can at least recoup your costs. Remember, our margins are extremely high. So the idea it would be to at least recoup the cost of the product. So inventory obsolescence is not something that's very significant in our business.

Got it. Thank you so much.

And we have been able to -- we -- yes, and I will continue. And in Paris and in New York, we have been able to push-out millions of dollars of deliveries of components. So, yes, today, I think, at the end of March, our inventory level was the same as it was at December 31, but it's going to increase a little bit more in the second quarter just because we don't have the sales that we expected. And let's not forget that we buy, we place our purchase orders of components six months to seven months in advance of delivery. So, of course, today we have too much. But we think that at the end of third quarter and basically at the end of fourth quarter, we will be back to something that is very acceptable.

Our next question comes from Steph Wissink with Jefferies. Please state your question.

Hi. Good morning, everyone. I just had a few follow-ups. So first, maybe Russ this is for you is on -- apologies about the background, license minimum. If you have any sort of agreement that would strike some sort of minimum guarantee?

Yes. So many of our licenses do have certain minimum guarantees. However, the good news is that we have been working with each and every one of our licensees, pretty much from the day this pandemic first came to -- into existence. And in many cases we have already received modifications of the license agreement. Our goal is basically to modify these agreements where we pay based upon actual sales. And in most cases, so far, where we have negotiated, we've been able to work with our partners and alleviate the strain of the minimum guarantees.

Very helpful. Okay. Second question is just with respect to M&A, as you think about the post-crisis period, are you seeing anything even now around brands that might be loosened up in some portfolios that could be interesting for you to take on?

Well, we were -- we have been working on quite a few different things prior to the pandemic coming out. I think the fact is that right now everybody is in basically survival mode. This pandemic has affected which is just about every single industry. Certainly, any of the companies that would be potential licensors are also severely affected. So everybody kind of is in their survival mode, doing what they need to do to run their business, to maintain their businesses, to prepare themselves for the post-pandemic opportunities. So I think that many of the things that we were working on will resurface once things get a little bit back to normal. We really haven't been pursuing anything brand new during this pandemic. I think our efforts have really been concentrated on business at hand. Jean, do you want to add anything?

No. I think that just before the pandemic we were absolutely pursuing a couple of interesting brands, which we would like to add to our portfolio, and the conversations were moving in the right direction. But again the last two months, it will be -- I don't think it's a time to go back to this conversation, people are busy protecting their business, their people. But definitely in the next weeks or months, we will go back to the table and talk to different, very interesting brands that we can add to the stable.

Great. And then just a final housekeeping, I think, I wrote this down but right, Jean, but you said, your e-commerce business in China is bigger than bricks-and-mortar? Is that correct?

Definitely, definitely. Yes. Three times -- it's three times bigger.

And has that been the case even pre-crisis or is that what you're seeing currently in this month?

Yes. It started really -- for us, it started really almost year and a half ago when we developed these programs with Tmall and JD. So we have a very strong distribution in China. Again, some of our brands, like, Anna Sui or Lanvin, even Coach are well recognized in China and that's why we are able to have such a nice e-comm business.

Great. Thank you very much.

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

Hi. So, first off is, does the push out in product releases in 2020 to 2021 delay your plans for any previously planned releases in 2021?

Well, we work with each of the brands, we work with a calendar of product launches. So I think the answer would be yes. If we launched a master new fragrance family in 2020, we would have gone with a flanker for that family in 2021. If we move the launch out, the idea would be you are going to launch your new pillar in 2021, it would be silly to launch a flanker simultaneously with it. So theoretically your calendar moves out by the six-month delay or seven-month delay. It's just as if 2020 didn't exist. I mean that's kind of how we're really approaching it. It's a rebuilding stage based upon something that came to us so unexpectedly.

Okay. And how is channel inventory ahead of planned reopening? Do you think there will be a significant delay as far as restocking is concerned?

I'm sorry, I didn't hear the beginning of the sentence of the question?

No. But how is the –

What?

Channel inventory.

Yes. The question is with respect to channel inventory, when do we think that we're going to start seeing restocking? I think we're also in a situation that many of these retail locations closed rather suddenly. So there is an existing inventory that is in the channel. I think it's really going to depend on how the customer, how acceptable the experiences for the customer to come back to the retail channels and to see where the demand is. And at that point, then you'll get to restocking, but right now I think that there's plenty of product in the channels, it's just that the stores are closed and there's nothing being sold.

Okay. And then last question –

If a channel -- if I may. If a channel, I totally agree with you, Russ, because the stores closed very abruptly, and there was inventory in the stores. But we monitor very carefully the inventory at the wholesale level, at our distributors and agents. And there, the inventory is not high. And that's one of the reasons also that we're able to collect our receivable so well. They are not overstocked. So I don't say that they will reorder immediately as the store open -- after the store open, but it means that the month or two after the stores open, we will see reorders from our distributors.

Okay. And then are you planning any changes to your go-to-market strategy? Are you just going to spend more time online -- for the online sales instead of retail?

Russell?

We are -- it's interesting, it's a good question. We are experimenting with a lot of different online opportunities. Simultaneously we're working, probably, with three or four different online venues, if you will, to see how we can increase our presence with respect to e-commerce. That is a platform. That is a strategy that the company is pursuing but we are still at the very early stages.

Thank you. Ladies and gentlemen, there are no further questions at this time. I'll turn it back to management for closing remarks.

Great. Thank you. And thank you all for joining in today's conference call. As usual, if you have further questions, please contact me by email and I will do my best to get back to you. Please be safe and stay healthy, and have a great day. Bye.

This concludes today's conference. All participants can disconnect. Have a good day.