Party City Holdco Inc.

Good morning and welcome to the Party City fourth quarter 2020 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw from the question queue, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Ian Heller, Vice President and Deputy General Counsel. Please go ahead.

Ian Heller Thank you, operator. Good morning, everyone, and thanks for joining us. This morning, we released our fourth quarter and full year 2020 financial results. You can find a copy of a press release on our website at investor.partycity.com. Now I'd like to introduce our executive team who are here on today's call. We have Brad Weston, our Chief Executive Officer, and Todd Vogenson, our Chief Financial Officer. We'll start the call with some prepared remarks by Brad and Todd before we open it up for Q&A. Please note that in today's discussion, management may make forward-looking statements regarding their beliefs and expectations about the company's future performance, future business prospects, or future venture plans. These statements are subject to risks and uncertainties that could cause actual results to differ materially from these statements. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we can give no assurance that such expectations will be realized. We expressly disclaim any duty to provide updates to our forward-looking statements, whether as a result of new information, future events, or otherwise. We urge everyone to review the safe harbor statements provided in our earnings release, as well as the risk factors contained in our SEC filings. During today's call, we will refer to both GAAP and non-GAAP financial measures of the company's operating and financial results. For more information regarding our non-GAAP financial measures and reconciliation to the most directly comparable GAAP measures, please refer to the earnings release. And with that, I'll turn the call over to Brad Wesson.

Thank you, Ian. Good morning, everyone, and thank you for joining us today. I'll review our financial and operational results for the fourth quarter in 2020 and then discuss our progress and go-forward plan on our five strategic initiatives. Todd will then elaborate on our financial results and provide some thoughts on how we are approaching 2021. Before turning to our results, I want to start by expressing my deepest gratitude to the entire PCHI team for their hard work and contributions throughout the year. I could not be more proud of all they accomplished in 2020, rising to the challenges presented by the global pandemic and positioning us to win, despite the environment. Their grit and determination during these unprecedented times allows us to maintain continuity of our retail and wholesale operations while continuing to meet the changing needs of our customers who look to continue celebrating in unique and different ways. And they did all this while simultaneously executing against our strategic initiative, driving progress against each one, enabling our improved financial performance, and setting the stage for further progress and improvement in 2021. Key amongst our accomplishments in 2020 were acceleration and expansion of our omnichannel capabilities, including curbside pickup and delivery, dramatically improving fulfillment options and convenience for customers. A more curated and edited assortment in-store and online to better meet customers' changing needs. A continued rationalization of the business to narrow our focus on our core North American vertical model. Initial rollout of next-generation store formats in 22 stores to pilot improved store experience and relevance with customers. Successful completion of our debt refinancing, which, combined with the additional refinancing of our term loan subsequent to quarter end, significantly strengthens our financial position and flexibility. Importantly, as a result of these transactions, we substantially reduced our debt and our next meaningful maturity is not until 2025. Our diversity and inclusion work focused on listening to the organization with empathy and evolved our strategy around three core components, raising awareness, creating a learning culture, and developing our infrastructure to embed diversity, equity, inclusion, and belonging into our people practices and everyday behaviors. 2020 was certainly a year without precedent. Our full year results reflect the significant impact of the pandemic to the business, including three months where we operated in a closed store environment or with limited stores open. During that time, our response to COVID-19 was centered on supporting the safety and wellbeing of our employees and customers. Importantly though, in the context of the pandemic, We successfully pivoted our operations and made meaningful progress on our five strategic initiatives as we put in place the foundational building blocks to prepare ourselves for growth, which I will discuss in a few minutes. This enabled a better-than-expected back half of the year with flat brand comps at retail, despite the COVID impact on our business that is centered around social gathering. Now let me discuss the key highlights of our fourth quarter performance. For the quarter, sales were 648 million, with brand comparable sales of negative 5.9%. As we shared in January, the rapid surge in COVID-19 cases had a greater than expected impact on customer behavior in the months of November and December. As a result, we saw underperformance in regions like the Northeast, as well as in certain categories like tableware that are most impacted by the reduced size of social gatherings. Importantly, we were very encouraged by the strength of our core categories across the fourth quarter, as strength in celebration occasions is a key focus and essential through expanding our relevance with customers. Comparable sales in our core categories were up 6.5% in the fourth quarter, which bodes well as we look forward to the post-pandemic normal we know will come eventually. I will now briefly discuss the progress in 2020 on the five strategic initiatives that underpin our work to stabilize our retail business, which are having demonstrable impact and will continue to build momentum going forward. I will then review our plans to advance our key priorities in 2021. One, developing a more relevant in-store experience. In 2020, we executed work to determine optimal assortment, inventory levels, retail pricing, seasonal transitions and the next generation store prototype. We opened 22 next gen stores for the year, delivering a far superior customer and associate experience. Our work identified and eliminated approximately $88 million of seasonal product at the end of the year that was unnecessary to carry going forward. And we will continue to optimize assortments across our core categories throughout 2021. These inventory reductions and operational processes are essential to improving the customer shopping experience and creates more time for our store associates to focus on customers. Two, wind and balloons. We saw significant success from our work around balloons last year and were rewarded with strong results in the category. As the dominant player in the global balloon business for manufacturing and wholesale, all the way through party city retail, we are uniquely positioned in the category with an unmatched breadth of assortment, innovation pipeline, and distribution capabilities. In 2020, we improved our go-to-market approach through customer-inside-led product innovation, inspiring experiences, and expanded fulfillment capabilities. We introduced new do-it-yourself balloon products supported by how-to interactive content, making it easier for customers to realize their vision for their celebration. We expanded the category by capitalizing on customer trends, making balloons a more accessible and relevant part of everyday celebrations. Three, address value perception in key categories. In 2020, we addressed price perception head on. Enforced by customer awareness, and new price elasticity modeling, along with trip driver and basket builder product profiling data, we reduced party city retail prices on over 9,000 SKUs, or almost one-third of the total current active SKU count. The customers noticed and responded favorably, with unit sale volume increasing as projected, driving incremental gross profit dollars for the enterprise. As a result, We now have this critical work behind us. However, we will monitor and analyze pricing data correlated with customer data on an ongoing basis to ensure we maintain relevancy based on price perception. Four, improve our customer engagement selling culture. As the pandemic emerged, we quickly pivoted and adapted our offering and go-to-market approach to meet our customers' evolving needs. enabling them to celebrate life's important milestones in a safe manner. Improving customer engagement across our marketing messages, our product and merchandising approach, as well as digital experiences with our brand, became critical to driving greater relevancy. Our dramatic shift in digital content, including new and more relevant content formats, carefully curated product assortments, Inspirational solutions and new technology has driven growth in consumer engagement as well as online conversion rates. Digital workshops and interactive content across our social platforms garnered hundreds of thousands of views and reached millions of consumers, reinforcing our authoritative position as the celebration leader. Five, build on our omni-channel platforms. I already touched on the expanded fulfillment option whose launch was accelerated by the pandemic in spring 2020. We also fast-tracked improvements to our website experience to make omnichannel purchase options simpler and more seamless. This focus generated buy online pickup in-store, curbside, and delivery growth of approximately 35% in 2020. making these capabilities core to our customer experience. As we look to 2021, armed with greater consumer insight and with a strong foundation to build upon, we're continuing our evolution and transformation. We will take significant steps in furthering our mission to deliver the party platform by advancing the following fundamental building blocks, product innovation, in-store experience, being celebration obsessed and continued leverage of our vertical model. Product innovation. Our focus on product innovation is grounded in consumer insight and data. Our goal is to stay extremely relevant with the consumer, fortifying our position of authority when it comes to celebration. We have significant opportunity to advance our product relevancy with both increased innovation and quality. Our teams are building an aggressive and more expansive innovation pipeline that will make us a better product manufacturer, wholesaler, and retailer. We're also investing in quality. Our focus is not to drive retail higher with more expensive products, but to bring product to market that is even more relevant and better resonates with the end consumer, enhancing the joy in celebration. In-store experience. we will continue our relentless focus on improving the in-store experience for customers and making it easier to shop. The customer and operational insights we generated in 2020 are allowing us to both modify the go-forward prototype for our next-gen stores, as well as improve the experience in our legacy stores. These include new, edited, and curated assortments across the chain, with corresponding reductions in inventory needs, improved product adjacencies, lowered planogram heights, as well as new services and experiences. While we've not yet finalized the exact number of next-gen stores we will open in 2021, all new, relocated, and remodeled stores will be in the next-gen prototype. We are bullish on the results we have seen thus far with this new prototype and are planning to be aggressive with the number of stores we remodel annually at this point. By the end of this quarter, we will have 20 next-gen stores remodeled or opened thus far in 2021, bringing our total to 42. We rolled out a comprehensive plan in February to elevate our engagement with customers in our stores. This initiative will support and position team members to better partner with customers to inspire celebration ideas and facilitate solutions for every party need. Enabled by curating our assortments and eliminating unnecessary tasks, our team members will be better positioned to partner with customers, increasing satisfaction and basket size. Be celebration occasion obsessed. New customer insights and basket data illustrate our ability to reinforce our authority and leadership as the celebration occasion destination. It starts with how we market occasion and communicate with our customer as a specialist versus a generalist in the marketplace, which highlights our unique capabilities. The focus on our core categories, birthdays, balloons, and entertaining, have significantly contributed to our recent performance. When consumers want to make their celebration special, our unique value proposition of the best assortments, newest innovation, party planning knowledge, relevant pricing, convenient fulfillment options including delivery, and one-stop shop availability puts us in solid position to take market share. An enhanced social and influencer strategy will introduce celebration inspiration into the consideration set of more consumers. building greater visibility for the complete party solutions and unique one-stop shop opportunity we provide, demonstrating why the brand is the category leader. The selection and purchase process for celebrations on PartyCity.com will also improve significantly this year. The new UX design includes the ability for customers to build their own customizable party package ready to be picked up in store or delivered to their home exactly the way they designed it. We are also focused on our North American vertical model. Following progress on rationalizing our international operations with the 2019 sale of our retail business in Canada, Combined with the sale of a substantial portion of our AmScan international business announced in December 2020, we enter 2021 with a streamlined focus on our core North American party platform and with the goal of operating a more effective and customer-led vertical model. A key building block to achieving this is an improved supply chain, which we'll be working on in 2021. This includes driving new efficiencies in transportation, distribution, and inventory levels throughout the vertical model. We will add new demand forecasting and planning capabilities, along with expanded use of warehouse management systems. Importantly, we expect these efficiencies to help offset some of the increasing transportation and distribution costs headwind the industry is facing, which Todd will discuss. And finally, We see continued market expansion opportunity as we further evolve our omnichannel capabilities and extend our leadership position in key categories further and deeper across channels. We will begin to deploy new digital commerce channels, particularly in social commerce, enabling us to make it easy for customers to shop us in their channel of choice. We'll continue to keep you updated on our progress on this front as we have more to share. Turning to our outlook, the operating environment remains far too dynamic to provide any sort of formal outlook for 2021. But I will share that we are pleased with our quarter-to-date performance, and Todd will provide some additional details on our expectations for first quarter results. As we think about the remainder of the year, we see more opportunity in the back half as vaccinations take hold, followed by a gradual return to more no-mark social gatherings. Regardless, we will remain disciplined and agile as we demonstrated we have the ability to be in 2020. So in summary, despite the challenges the pandemic presented, we are pleased with how our organization navigated the environment, swiftly pivoting to meet the evolving needs of our customers, all while prioritizing the health and safety of both our associates and our customers. We made important strides on our five strategic initiatives in 2020 and significantly improved our financial position through the successful completion of our debt exchange offering in July and then the term loan refinancing in February 21. I am proud of all that has been accomplished thus far and the hard work and commitment demonstrated by the entire PCHI team as we continue to transform the business. As a result of all this work, We are in a substantially stronger position today as we enter 2021. We see significant opportunity to further strengthen and leverage our position of authority in the industry. And now I'd like to turn the call over to Todd to discuss the fourth quarter and pull your results in more detail and share some thoughts on 2021. Thanks, Brad. And good morning, everyone. Today, I'll focus on the key highlights of our fourth quarter and full year performance, and then I'll discuss how we're approaching fiscal 2021. For full details regarding our financial results, please refer to our earnings press release and the accompanying slides, which are available on the investor relations section of our website. As Brad discussed, we're pleased with how the organization navigated the environment during the fourth quarter and throughout 2020 as we swiftly pivoted to meet the needs of the evolving customer demand. Despite the challenging operating environment, we made strong progress and advanced our strategic initiatives, both operationally and financially. Despite the pandemic, we generated higher free cash flow in 2020 than we did in 2019, and we ended 2020 with approximately $296 million in total liquidity. The fact that we were able to improve our cash flow during this challenging environment speaks highly to the discipline and focus with which we operate our business. Now, turning to our results. As a reminder, it's still 2020, and our retail segment included a 53rd week, creating a calendar shift. with the full-year retail calendar ending on January 2nd in 2021 versus December 28th in 2019. This pulled a significant portion of New Year's Eve sales into the fourth quarter of fiscal 2020, which would have otherwise fallen into the first quarter of fiscal 2021. So in 2020, the 53rd week contributed $40 million in revenue, approximately $12 million in adjusted EBITDA, and approximately $0.08 in adjusted diluted EPS. For the fourth quarter, consolidated revenues were down 11.4%, which includes brand comparable sales decline of 5.9%, the impact of 77 store closures from our 2019 and 2020 store optimization program, and a wholesale revenue decline of 24% on a constant currency basis. The brand's comparable sales decline was reflective of the rapid surge in COVID-19 cases that Brad discussed. And importantly, though, comparable sales for our core everyday categories during the quarter were up 6.5%. The Q4 wholesale decline included four primary components. First, international revenues, including Canada, which declined sharply due to government-mandated lockdowns throughout the quarter. second mass and value customers domestically who had been performing solidly but were also impacted by the overall softness in party supply demand during the quarter next franchisees and independents who as a general statement have lagged our party city retail scores throughout the coveted time frame and finally our balloon manufacturing business anagram as we've said before Enneagram's innovative designs and market strength have resulted in strong relative category performance, but we did have some shipments move out of Q4 and into Q1, resulting in third-party revenues down 6.2% in the fourth quarter. Adjusted gross margin rate for the company declined 50 basis points in the quarter to 39.7% from adjusted gross margin of 40.2% in the prior year period, and primarily due to fixed costs due leverage on the sales decline. Adjusted operating expenses were approximately $200 million, a decrease of $5 million from the prior year period, largely from our expense management in response to the revenue declines in the quarter. So as a result, adjusted income from operations was approximately $59 million compared to adjusted income from operations of $91 million last year, Adjusted EBITDA was approximately $77 million compared to $120 million in Q4 of 2019, and earnings per share was $0.25 on an adjusted basis compared to adjusted EPS of $0.51 in the prior year period. For the full year, consolidated revenues declined 21.3% on a constant currency basis, which includes brand comparable sales decline of 16.5%, primarily reflecting the impact of COVID-19 on our business, 77 store closures in 2019 and 2020 related to our store optimization program, and a wholesale revenue decline of 21.7% on a constant currency basis as domestic and international customers contended with the same pandemic headwinds to demand store operations throughout the year. Adjusted gross margin rate declined 290 basis points to 34.2% from adjusted gross margin of 37.1% in the prior year, primarily due to due leverage on fixed costs and the sales declines. Adjusted operating expenses were approximately $616 million, a decrease of $82 million from the prior year, driven largely by our prudent management of expenses throughout the year, as well as temporary benefits from cost cutting relating to the pandemic. As a result, for the full year, adjusted income from operations was approximately $21 million compared to adjusted income from operations of $178 million last year. Adjusted EBITDA was $96 million compared to $269 million in 2019. And adjusted loss per share was $0.49 compared to adjusted earnings per share of $0.46 in the prior year period. Turning to the balance sheet. Inventory was down 37.4% year over year due to three primary drivers. First, we had $88 million in our previously disclosed disposal of seasonal inventory in the fourth quarter as we made the strategic decision to target higher in-season sell-through and less annual inventory carryover. Next, $66 million in international inventory that was sold as part of the previously announced sale of a substantial portion of our international business. Then finally, ongoing working capital management, which included realizing the benefits of an optimized brick and mortar store base. The details of the inventory write-down and the sale of international operations will be included in the 10-K, which will be filed later today. As we look forward to 2021, we continue to plan for improved inventory turns through more curated assortments and improved seasonal sell-throughs and just overall core inventory management. At the end of 2020, our balance sheet and liquidity position was significantly improved versus 2019 as a result of multiple actions that we took to strengthen our financial health this year, These include the sale of a substantial portion of our Amscan international business, which closed in January, the successful exchange offer transaction completed in July, last year's sale of our Canadian stores, and our ongoing working capital management. As of the end of year, we reduced the principal balances of debt, net of cash, by approximately $430 million versus prior year period, Our year-end liquidity position of approximately $296 million is comprised of $120 million in cash and $177 million of revolver availability. I'm very proud of all that we accomplished this year to strengthen the business and our financial health. Subsequent quarter end, in February, we completed the refinancing of our 2022 term loan through the offering of senior secured notes. which is just yet another step to strengthen our financial health and flexibility and to provide the runway to implement our strategic priorities. To that end, we feel confident as we're entering 2021 in an even stronger financial position. So now let me turn my comments to how we're thinking about 2021. While we're optimistic about the prospects for sustained economic recovery in 2021 and the eventual return to normal, We recognize that business risks remain elevated from the COVID-19 pandemic. So given those factors, in the interim, we're not providing specific annual sales and earnings guidance. We are, however, providing select annual guidance for interest expense and capital expenditures. We expect interest expense to be in the 90 to $100 billion range for the full year. In terms of capital expenditures, We expect our 2021 spend to be in the $70 to $80 million range, with balanced spend across our next-gen stores, web and e-commerce enhancements, store facility investments, and ongoing investments in our manufacturing and supply chain assets. In terms of sales and earnings, while we're not providing full-year guidance, since we are about 75% of the way through our first quarter, we have provided our outlook for the first quarter in today's earnings press release. Based on quarter-to-date results, we expect our consolidated sales for the first quarter to be approximately $397 to $410 million, with the brand comp sales increase in the 26 to 31% range compared to the 13-week period in 2020. Now, as I mentioned, 2020 was a 53-week year for our retail segment, which creates a shift in the calendar weeks, causing New Year's Eve, to move into the fourth quarter of 2020, and so the first quarter of 2021. If we unshifted last year's New Year's timing, Q1 comparable sales that are in our guidance would still show an increase of 9% to 14%. According to date, we continue to see strength in our core categories, as Brad mentioned earlier, This core strength has allowed us to drive strong demand through a quarter that is traditionally heavy in many holidays that can end up being meaningful to our business, including things like Super Bowl, Valentine's Day, 100 days of school, Dr. Seuss Day, St. Patrick's, Mardi Gras, and several others. So the strength in our core also bodes well as we look for a return to some form of normal as our current cost structure changes. should enable strong leverage, even on modest comparable sales growth. For the first quarter, there are a few unique items that will impact our performance, which we did want to highlight for your planning purposes. First is the impact of New Year's Eve, which we estimate is $9 million in EBITDA that was shifted into 2020 due to the 53rd week. Next are a couple of cost factors. Two evolving areas that we get asked about frequently are helium and omni-channel delivery costs. The total of those two elements is a headwind of approximately $6 million in the first quarter relative to 2018 and 2019 levels. As others have discussed, there are transportation cost headwinds that we're working to mitigate also. Net of our mitigation work We expect those headwinds to adjusted EBITDA to be $8 to $10 million for the full year of fiscal 2021, with the bulk of those costs expected to be recognized in the second quarter through fourth quarter. And finally, as we confirmed today, we did complete the sale of a substantial portion of our international operations at the end of January. The revenues for those operations were approximately $250 million in 2019, and $55 million in the first quarter of 2020, with an immaterial amount of EBITDA in both periods. So those amounts are going to impact our revenue and metrics as we wrap around on the transaction and continue throughout 2021 to wrap around. We clearly have a lot of moving pieces in our financials. The bottom line is that we are exceeding our expectations in 2021 thus far. And the positive signs that we're seeing in our strategic initiatives and core business give us reason for optimism as we progress through the year. So in summary, 2020 was an unprecedented year, but we are very proud of all that we've accomplished to advance our strategic priorities and to enhance our financial health. while still maintaining the continuity of our retail and wholesale operations. We finished 2020 as a better and stronger company and are well positioned to capitalize on the opportunities ahead of us in 2021 and beyond. And with that, I'll turn it over to the operator to start the Q&A session.