Party City Holdco Inc.

Good morning and welcome to the Party City fourth quarter 2021 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Eric Warren, Treasurer and Head of Investor Relations at PartyCity. Please go ahead.

Thank you, Operator. Good morning, everyone, and thanks for joining us. This morning we released our fourth quarter and full year 2021 financial results. You can find a copy of our 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 Vogeson, 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 four looking statements regarding their beliefs and expectation about the company's future performance, future business prospects, future events and plans these statements are subject to risks and uncertainties it could call actual results to differ materially from these statements although we believe that the expectations reflected in these four 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 our risk factors contained in our SEC filings. During today's call, we'll 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 reconciliations to the most directly comparable GAAP measures, please refer to the earnings release. With that, I'll turn the call over to Brad West.

Thank you, Eric. Good morning, everyone, and thank you for joining us today. I'll begin our call with a review of our financial and operational results for the fourth quarter in 2021, and then discuss our go-forward plan on our strategic initiatives that support our purpose to inspire joy and make it easy to create unforgettable memories. Todd will then elaborate on our financial results, and provide some thoughts on how we're approaching 2022 before we open the call to your questions. Our transformation process began in 2020 as we focused on executing strategies to stabilize our business and determine our path to market expansion. 2021 was an important year in our transformation process. Despite the continued challenging and volatile backdrop, the business performed extremely well as the consumer returned to social gatherings, celebrations, and parties while we continued to implement significant operational and capital structure improvements. We delivered a strong year of financial and operational results. Total sales increased 17%. Retail sales increased 28%. Adjusted EBITDA increased over 178% to $266 million, and adjusted earnings per share increased to 68 cents per share compared to a loss last year. Key among our operational accomplishments were we delivered strong results in our core categories at retail, demonstrating traction of our overall strategy, enhanced the in-store experience for our customers, with an increased focus on product quality and innovation, including five major category resets while strengthening our pricing power. We accelerated the rollout of next-gen stores by opening or remodeling 73 stores in 2021 with encouraging store economics and returns, ending the year with a total of 95 next-gen stores. Go continued improvement and increased traction in our omnichannel capabilities, including buy online, pick up at store, pick up at curbside and delivery, making it easier for our customers to fulfill their celebration needs and resulting in an increase in digital sales. Finalize the sale of our international wholesale operations, providing us opportunity to increase our focus on our North American vertical model. We completed an inventory write-down at year-end in support of our initiatives to right-size and optimize inventory, with this effort now fully behind us. Operated with strong execution by the entire PCHI team securing merchandise, managing through the significant supply chain disruptions impacting the industry, and staffing the stores to meet the demand. we strengthened our financial position in liquidity by refinancing our term loan at the beginning of the year. Now, let me discuss the key highlights of our fourth quarter performance. We are pleased with our fourth quarter performance with results that met our expectations. For the quarter, consolidated sales were up 7.7% to $698.3 million with brand comparable sales of 17.8%. As you recall, we reported a brand comp of 16% for the month of October. As mentioned in our Q3 call, we experienced a really solid Halloween with October results that were better than expected. Subsequent to Halloween, In November and most of December, we saw continued strength in our core business as we continue to build momentum in this area. In the latter part of December, though, we saw a softening in demand based on the reduction in social gatherings due to Omicron, with these trends continuing into January, most profoundly in the Northeast. However, as we have experienced with past surges and subsequent updating of cases, We've already seen a pickup in demand over the past few weeks. E-commerce continued to perform well in the quarter as customers continue to use our expanded fulfillment capabilities. Visually enabled sales increased to 14.5% of our sales in Q4 of 270 basis points versus Q4 2019. In terms of our wholesale performance, our domestic wholesale consumer products business continues to regain strength. Anagram, again, performed very well in the fourth quarter, and we're continuing to increase production capacity to keep pace with the increased demand. Adjusted EBITDA was $105.2 million, which was also in line with our expectations, as Todd will discuss further in a moment. turning to our strategic initiatives. In 2021, we made good progress advancing the fundamental building blocks of our transformation strategy across product innovation, in-store experience, being celebration occasion obsessed, and focusing on our North American vertical model. Those investments have yielded important benefits. And in 2022, we will build on this progress in two areas, including one, ongoing enhancements in customer engagement, as well as two, digital platforms, information technology, and supply chain. First, customer engagement. We will continue to enhance the way in which we engage with our customers as we remain focused on increasing relevancy and our mission of being customer and celebration obsessed. ensuring we deliver on our purpose to inspire joy and make it easy to create unforgettable memories. We will support this initiative at retail through various strategies, including continued rollout of our NextGen stores. We are extremely pleased with customer response with our NextGen stores as we enhance and refine the prototypes. Remodeled stores are continuing to average a mid-single-digit sales increase with improved gross profit compared to control stores with a run rate that delivers a payback period on each store of less than 24 months on average. As a result of this strong performance, we remain committed to an aggressive rollout plan in 2022 and beyond with approximately 100 to 125 next-gen remodels or reopenings targeted for 2022. which would result in about a third of the fleet being converted by the end of 2022. As we've gained insights from the first generations of our NextGen prototype, we will be introducing several enhancements to the format to increase the level of inspiration in the store experience. These will be introduced beginning in March, and we'll quickly study the results and roll out enhancements as they meet our required financial thresholds. As we demonstrated in 2021, quality improvements and innovation brought life through category resets that drove significant improvements in our retail business, contributing to our comp sales performance of up 34.2% compared to 2020. We will continue to aggressively lead in both product innovation and quality improvements to solidify our position as an authority in the celebration space. In 2022, we plan to improve quality of over 500 items, introduce 250 innovative items, introduce new platforms to customers. Two examples occurring in Q1 include a new yard sign program and the introduction of both traditional snacking items and better for you options in our candy department. Leverage brands to clearly segment quality and occasions consumers improving the overall shopping experience. Our first brand launch will be in our tableware category in Q2. We look forward to telling you more in the coming quarters. This year, we're enhancing our customer engagement on our website by transforming the experience from just selling party supplies to providing the full party solution. The site will pivot from shopping SKU by SKU to to also providing an inspirational and empowering celebration building experience. Instead of having to search and find products for your celebration on the site, the user will now be able to browse and customize curated party assortments, build a customizable balloon arrangement, send balloons like you would flowers, build a complete customized celebration, and get assistance from a certified party planner. The new flexible website platform and the development of specialized patent-pending digital tools, such as the Balloon Builder, are designed to drive more quality traffic, increase conversion, and grow average order value. It will now allow us to offer shoppable video content, seamless social commerce experience, cross-category shopping, improved omnichannel shopping journey, and enriched search results. after the launch of the new site later this spring, we'll continue to add even more enhancements. In the meantime, we already piloted the customizable balloon arrangement builder for New Year's Eve and Valentine's Day. Both seasonal tests experienced higher conversion rates and larger average order values than site averages and provided customer insights that give us the confidence to expand the digital tools capabilities. Within our wholesale business, we bolster our capabilities to provide actionable consumer insights to our partners, which is beginning to manifest in share expansion within existing accounts and securing new customer opportunities. We expect strong growth from the consumer products division in the year ahead. In our Anagram Balloon business unit, we significantly increased capacity throughout 2021 to meet customer needs. further solidifying Anagram as the leader in this category. This transmitted into record Valentine's Day performance with strong double-digit growth. In 2022, we'll continue to expand our leadership in the category with an aggressive innovation plan that both supports traditional balloon usage and expands usage occasions by introducing products in rapidly growing subsegments, such as do-it-yourself options. We've invested in a service team dedicated to our largest customer, Canadian Tire, which owns the Party City brand in Canada. This investment is critical to partnering with them to continue to drive growth in Canada. Business with our independent party store customers and other third-party customers grew in Q4 versus both 2019 and 2020. Second, digital platforms information technology, and supply chain. Our vertical model is the powerhouse of our brand, and we reap many benefits from the integration of our retail and wholesale business, including unparalleled category expertise, operating synergy, and elevated margins. Going forward, we will continue to fortify these advantages and take incremental actions to further mitigate supply chain challenges. These enhancements include investing in our supply chain to enhance and continuously improve in stocks and service levels across selling channels. Supply chain investments include further integrating supply functions to drive operational synergy, adding sourcing talent and capabilities in the U.S. and Asia, leveraging transportation and logistics opportunities namely chartering vessels and leasing our own containers, utilizing East Coast ports with wider traffic to deliver to DCs predominantly on the East Coast, and enhancing processes to shorten lead times. Investing in Enneagram manufacturing capacity and innovation, adding printing and fabrication machinery to further enhance our supply and market differentiation and extend our lead in the balloon business. Investing in digital technology and IT infrastructure, including new talent and resources, creating foundational capabilities that allow us to drive operational synergies, as well as the customer engagement enhancements I framed a moment ago. Significant upgrades in our digital capabilities and the technology that drives it further advance our ability to inspire joy and make it easy for customers to create their unique celebrations. and create another key market differentiator. New data architecture, inventory management technology investments, and increased space timing capabilities improve our knowledge, analytical capabilities, and productivity, benefiting our business as well as our partnerships across our wholesale channels. Now turning to our outlook for 2022. As anticipated, the environment remains somewhat volatile and supply chain headwinds persist for the industry, which will be most evident in our Q1 results, as Todd will outline. Against this backdrop, we continue to be committed to delivering an improved customer experience as well as exercising our pricing power in the celebrations market by expanding our already strong understanding of where the consumer is receptive to increased prices. The consumer's acceptance of our price actions thus far bodes well for us as we continue to manage inflationary pressures through both price as well as cost mitigation actions. We are excited to be beyond the latest Omicron surge and see customer demand in line with full-year guidance. We look forward to advancing our transformation and building on our success in 2022. And this is reflected in our outlook for adjusted EBITDA to increase in the high single digit range at the midpoint of our guidance range. So in summary, we are pleased with our 2021 performance and progress made as we continue to transform the business, pivoting to a more customer-oriented, celebratory-obsessed company. one of the things we are most proud of is the work we've initiated on the ESG front. In 2021, we made significant progress with 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 belongings into our people practices and everyday behaviors. As we shifted into 2022, we established an ESG committee and are ready to issue our first ESG report later this year. And now I'd like to turn the call over to Todd to discuss the fourth quarter and four-year results and the 2022 outlook in greater detail. Thanks, Brad, and good morning, everyone. Today, I'll focus on the key highlights of our fourth quarter results and full year performance, and then I'll discuss how we're approaching fiscal 2022. For full details regarding our financial results, the accompanying slides, which are available on the investor relations section of our website.