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spk03: Good morning and welcome to the Party City first quarter 2022 earnings conference call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. If you would like to ask a question during the presentation, you may do so by pressing star 1 on your telephone keypad. If you wish to withdraw your question, please press star 2. If you have joined us online, please press the red flag icon. 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.
spk01: Thank you, operator. Good morning, everyone, and thanks for joining us. This morning we released our first quarter 2022 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 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 events and 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 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 four looking statements, whether as a result of new information, future events, or otherwise. We urge everyone to review the safe harbor statement provided in our earnings release, as well as the 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. And with that, I'll turn the call over to Brad Westin.
spk05: Thank you, Eric. Good morning, everyone, and thank you for joining us today. I'll start with a review of our first quarter results, followed by an update on our key focus areas for 2022, namely ongoing enhancements to customer engagement as well as digital, IT, and supply chain enhancements. Todd will then review our financial results in more detail and cover our outlook. Since we last spoke to you at the end of February, the environment for the average consumer has been impacted by a number of factors, which in turn affected our March sales. In addition, we faced some unique cost pressures in the month of March, some of which are expected to persist in the short term. Let me start with our sales that were up 1.4% in Q1. As discussed on our Q4 call, in January, we saw a softening in demand based on the reduction in social gatherings due to Omicron. Given the abatement of cases, we saw a pickup in demand in February. However, starting in March, there were a multitude of factors impacting the consumer, namely inflationary pressures, including rapidly rising gas prices, rising interest rates, the anniversary of stimulus payments, and geopolitical instability. We saw this impact our customer behavior at the end of Q1, and those trends have continued thus far in Q2 to date. On the profitability side, adjusted EBITDA in the first quarter was 4.6 million versus 32.4 million last year. As we discussed last quarter, We expected a material decline in adjusted EBITDA year-over-year in Q1 due to the temporary disruption from the Omicron variant earlier in the quarter, combined with input cost headwinds for which additional offsets ramp up later in the year. We saw the expected margin headwinds in Q1 play out, but were also impacted by two additional cost pressures. I'll spend a moment on these two factors. First, freight and port fees. While we expected freight to be a headwind in the first quarter, freight costs did not abate quite as we had predicted given ongoing supply chain challenges. In addition, we incurred greater than expected port fees given delays in the unloading of containers. We estimate this excess freight and port fees impacted gross profit by approximately $12 million versus prior year in gross margin by 280 basis points in Q1. Second, helium costs. As a reminder, we have shared previously that we have significantly diversified our helium supplier base and entered into multiple well partnerships, as well as long-term supply agreements that have significantly improved the company's ability to source helium. That said, there have been a number of factors that have combined to tighten the global helium market. Let me highlight a couple of these developments for those who are not as familiar with the helium market. First, in the U.S., the plant managed by the Bureau of Land Management, which produces 8% of global helium supply, has experienced operational issues since July 2021 and a complete shutdown since January 2022. Many of these safety concerns and repairs have been addressed. and plant operations could resume as early as June. Second, in Qatar, where approximately 35% of global helium supply is produced, two of four plants were taken offline in March for scheduled maintenance. This maintenance has been completed, and the plants resumed operations in April. Lastly, a large Gazprom plant in Siberia experienced a plant explosion which has taken the facility offline. Although Russia only produced 3% of the global helium supply in 2021, this facility was expected to contribute a significant amount of global helium in the coming years and provide incremental supply to the Chinese market. As a result of these factors, all major helium suppliers have instituted allocations, which have resulted in a need for us to tap the spot market to augment our near-term helium needs. Fortunately, the work we've been doing to diversify our supply base has allowed us to establish strong relationships with many of the independent helium suppliers throughout North America. The good news is we've secured helium to meet our customers' needs, which is important ahead of our key graduation season. As a point of reference, today, 97% of our fleet is in stock with helium versus the 2018-2019 timeframe, when approximately a third of our fleet was without helium at any given time. However, this volume is coming at higher costs, which is impacting gross margins. In Q1, this impact was approximately $2 million to gross profit. While we started to see the impact in Q1, The second quarter will have the largest impact for the year, given the timing of the spot purchases, as well as the overall level of helium usage in the quarter. While we navigate this near-term turbulence in costs, we're being very thoughtful with our mitigating actions on the retail pricing front. As has been our consistent approach with any pricing actions, we will test and react, carefully balancing customer satisfaction with our financial priorities. These two factors combined negatively impacted Q1 gross margin and adjusted EBITDA by approximately 320 basis points and $14 million. Now turning to the composition of our sales performance for the quarter. Retail sales increased 2.3% with brand comparable sales increasing 2.1% despite the headwinds just discussed. Our core categories remain positive with strength from recent resets in the candy, birthday favors, and solid tableware categories. We were very pleased with the strength we saw in our seasonal business, which was driven by strong performance during Super Bowl, Valentine's Day, St. Patrick's Day, and Mardi Gras. For the quarter, our seasonal business come to positive 4%, and our core comparable sales improved 2% in the quarter versus 2021. We continue to leverage our full omnichannel model and the strength of each of our channels to provide customers flexibility and the convenience of multiple fulfillment options. To that end, digitally enabled sales represented 13.4% in the quarter. In terms of our wholesale performance, our domestic wholesale consumer product business saw solid results in Q1. And Anagram also continued strength in Q1 as we continue to increase production capacity at our balloon division. The macro environment remains choppy, and our teams are doing a good job managing through near-term challenges while still executing against our strategic priorities. We remain very encouraged by the operational progress we're making against these priorities, which better position us to drive long-term revenue and EBITDA growth. I'll now discuss the progress we made in Q1 on advancing these strategic initiatives in support of our purpose to inspire joy and make it easy to create unforgettable memories. First, ongoing enhancements in customer engagement. A critical component of our transformation is to enhance the way in which we engage with our customers to increase our relevancy with consumers. A key element within retail is the continued rollout of our next-gen stores. During Q1, we opened 35 next-gen stores, totaling 130 next-gen stores as of the end of the first quarter. We continue to see strong performance from these stores, which are averaging a mid-single-digit sales increase compared to control stores, with a run rate that delivers a payback period on each store of less than 24 months on average. We remain committed to an aggressive rollout plan in 2022 and beyond, with approximately 100 to 125 next-gen remodels or openings targeted for this year, resulting in about one-third of the fleet being converted by the end of 2022. In March, we introduced several enhancements to the format to increase the level of inspiration in the store experience. We focused on enhancing four key elements of our next-gen prototype, which are to, one, create additional inspiration with new merchandising and digital elements in the store. Two, expand balloon assortment and space to feature new innovation. Three, enhance our seasonal category presentations at the front of the store with new merchandising features for key items and new innovation. And two, four, add ease to the store navigation signing and checkout processes based on customer feedback. We are pleased with the early results and will add these features into the go-forward prototype. We continue to improve quality and innovation throughout our product offering and this year intend to introduce hundreds of new items. Our Q1 seasonal business is Super Bowl, Valentine's Day, St. Patrick's Day, and Mardi Gras produced healthy double-digit sales increases and expanded margin rates, driven by the innovation and quality improvements. We reset our spirit wear assortment and have been extremely pleased with the results. Our merchandising and product team saw a trend in creating customized, cohesive looks amongst friends, which are often showcased on social media. We developed options that allow individuals to create unique looks with a consistent theme with multi-packs of fun product such as face jewels, costume jewelry, and accessories. We also brought new innovation into our yard sign assortment with both fun and sentimental messages as well as single letters and numbers for customizable options. We are enhancing our customer engagement on our website. by transforming the experience from just selling party supplies to providing the full party solution. We launched our new patent-pending Balloon Builder digital experience with pilots for New Year's Eve and Valentine's Day. Both tests experienced 25% to 50% higher than average site-wide conversion and produced 35% to 45% larger AOVs. The Balloon Builder tool is designed to make building customized balloon arrangements easy. Our customers told us they want to visually build bouquets rather than choosing balloons skew by skew and imagining how they would look together. Balloon Builder works in a four-step process. First, select the focus balloon or the large balloon feature. Then add flare balloons, for example, foil shapes, followed by the fill or latex balloons. And finally, finish. by anchoring the bouquet with weights, plush toys, candy, et cetera. The customer can change balloons, quantities, and colors while visually seeing these changes as they are made. Then with one click, they can put the completed assortment into their basket. The Balloon Builder is now on the site ready for every customer to use for graduation celebrations. It's just one example of the digital experiences we're creating for our customers to make it increasingly easy for them to bring their celebrations to life. In early June, we'll launch a new website, which will enhance our mission of moving from selling party products to providing the full party solution. We're excited to deliver a digital experience that shifts from a transactional experience of shopping SKU by SKU to an inspirational and empowering celebration building experience. Within our wholesale business, We continue to expect strong growth from the consumer products division in the year ahead. Our anagram balloon business unit experienced continued healthy sales growth in Q1. To drive growth in a helium-constrained environment, we have a significant airfield offering and have packaged this as a strategic alternative for our distributors. Additionally, we're expanding our innovation in this segment to continue to expand our level of differentiation in the category. We've invested in our service team dedicated to our largest customer, Canadian Tire, which owns the Party City brand in Canada, and we continue to drive growth in this business. Finally, we continue to see solid business with our independent party store customers and other third-party customers with momentum accelerating in Q1. We are well-positioned for the back half of the year, especially Halloween, based on strong sell-throughs last year. Second, enhancements to our digital platforms, information technology, and supply chain. We continue to fortify our vertical model advantages and take incremental actions to further mitigate supply chain challenges. The supply chain is core to our advantageous vertical model and the integration of our retail and wholesale businesses. We are investing in strengthening our in-stocks and service levels across selling channels by adding sourcing talent and capabilities in the U.S. and Asia to create new supplier partnerships to enable our expansion of innovative and higher quality products, further integrating supply functions to improve our operational synergies, and we're leveraging transportation and logistic opportunities to shorten lead times and mitigate costs. We continue to invest in Anagram's manufacturing capacity and innovation by adding printing and fabrication machinery that allows us to enhance supply and market differentiation. We're also investing in digital technology and IT infrastructure, including new talent and resources that allow us to drive the customer engagement enhancements that I mentioned previously. We have made significant upgrades in our digital capabilities and the technology that drives it, further advancing our ability to inspire joy and making it easy for customers to create their unique celebrations. This serves as another key market differentiator. Lastly, we're investing in new data architecture, inventory management technology, and increased space planning capabilities that improves our knowledge, analytical capabilities, and productivity, all benefiting our business as well as our partnerships across our wholesale channels. In terms of our outlook, The operating environment remains dynamic, and we continue to expect supply chain volatility and inflationary pressures to persist through 2022. In April, we've seen retail comp sales trending lower by approximately 4% versus 2021, and Todd will discuss the specifics of our 2022 outlook shortly. Importantly, while still very early, we're expecting a solid graduation season this year. We remain committed to delivering an improved customer experience as well as exercising our pricing power in the celebrations market as we continue to work to help offset inflationary pressures. As a reminder, some of these price increases take time to take hold, particularly in our wholesale business. So we expect to see an increasing benefit as the year progresses. So in summary, While Q1 came in softer than expected given the challenging backdrop and macro headwinds, we are very pleased with the continued execution against our strategic initiatives. To that end, we're staying focused on the pieces of the business that we can control, and given the progress and success of these initiatives, we remain confident in the long-term direction of the business. And now I'd like to turn the call over to Todd to discuss the first quarter results and our 2022 outlook in greater detail.
spk09: Thanks Brad and good morning everyone. Today I'll focus on the key highlights of our first quarter results and then I'll discuss how we're approaching the remainder of the year. 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. We're pleased to deliver another quarter of top line growth, while bottom line results were impacted by both anticipated and unanticipated elevated cost pressures. Despite this, our team continued to make significant progress against our strategic priorities. For the first quarter, consolidated revenues increased 1.4% versus the prior year period, as sales growth was partially offset by the divestiture of a significant portion of our international operations, in the first quarter of 2021. Retail net sales increased 2.3% versus last year, driven by strong sales growth in several seasonal event categories, as well as an increase in average order value versus prior year. Brand comparable sales increased 2.1% year over year, as the strength in our seasonal categories was partially offset by underperformance in select everyday categories, driven by Omicron-related softness in January, and softer than expected March trends due to the difficult consumer backdrop. Wholesale revenue for the first quarter decreased 1.6% versus the first quarter of 2021, driven primarily by the divestiture of our international operations last year. Excluding the impact of the divestiture, net third-party wholesale revenues increased 14.5% versus prior year period, driven by continued positive performance at our anagram balloon division, higher sales to our franchise and independent customers, and continued improvement in our Canadian business performance. Adjusted gross margin rate for the first quarter decreased approximately 350 basis points from the prior year period, driven primarily by freight and raw material cost increases. As Brad mentioned, during the quarter we experienced increased port fees and higher than anticipated freight costs, which we estimate impacted gross profit by approximately $12 million or 280 basis points versus prior year. Adjusted operating expenses were approximately $152.2 million or 35.1% of net sales, a 260 basis point increase versus the prior year, primarily driven by increased store labor costs due to wage rate growth. As a result, Adjusted operating loss was $11.5 million compared to operating income of $14.7 million last year. Adjusted EBITDA was $4.6 million in the first quarter compared to $32.4 million last year. And first quarter adjusted loss per share was 22 cents compared to an adjusted loss per share of 5 cents in the prior year period. Turning to our quarter end balance sheet and cash flow, Inventory was up approximately 21% year over year, driven primarily by increased input costs, including capitalized freight expense, higher levels of in-transit inventory due to ongoing supply chain delays, as well as initiatives to improve in-stock positions. During the quarter, net cash used in operating activities was $116.8 million versus $48.8 million in the prior year period. The higher cash usage was driven primarily by an increase in working capital levels, as well as the decline in operating results. We ended the quarter with $122 million in liquidity, comprised of $33 million in cash and $90 million of revolver availability. At quarter end, we had a principal balance of debt net of cash of $1.43 billion. Now, let me turn my comments to the outlook for the remainder of 2022. Given the current inflationary trends, as well as challenging consumer backdrop, we're providing updated 2022 guidance. As a reminder, our guidance does not assume any impact from situations we can't reasonably predict with any certainty, such as COVID variants, additional inflationary impact, increasing geopolitical instability, or other macro disruptions. Our outlook does include what we've seen so far in terms of the macro backdrop, along with the mitigation measures that we've put into place. For fiscal 2022, we now expect net sales of $2.225 billion to $2.3 billion, or an increase of approximately 2.5% to 6% versus 2021. Brand comp in the range of approximately negative 1% to positive 2%. Gap net income of approximately $30 million to $48 million, assuming a full-year tax rate of 38%, and adjusted EBITDA of approximately $235 million to $265 million. As a reminder, our EBITDA estimate also includes approximately 40 basis points of impact from software expenses, which historically have been capitalized but will now be accounted for as an operating expense due to our continued migration to the cloud. In terms of capital expenditures, we now expect our 2022 spend to be in the $110 to $120 million range. In addition to this annual outlook, we also wanted to provide some color around the second quarter. As Brad mentioned, the consumer environment has been negatively impacted by a number of factors since we provided our last update. And we've seen an impact on our business with March and April retail comp sales trending lower. Given the prevailing sales trend, we now expect second quarter total company sales to be lower year over year. We also expect inflation pressures similar to the first quarter, which will negatively impact second quarter profitability. Lastly, while we're pleased that our helium sourcing strategies have ensured strong in-stock levels, We expect to see continued helium cost pressures as a result of the confluence of helium industry events that Brad described. In order to be well positioned to meet expected robust customer demand for helium balloons in the graduation season, we've made purchases on the spot market at higher rates than we had originally contracted and budgeted. Therefore, we expect a second quarter gross profit helium related headwind of approximately $7 million. We continue to carefully evaluate additional pricing and mitigation actions. Given these factors just described, we now expect second quarter adjusted EBITDA to be materially lower than prior year. We are still planning for strong growth in the second half of 2022, with trends improving throughout the year as more of our pricing actions continue to take hold and as we begin lapping input cost pressures from the third quarter. So in summary, The macro environment continues to be challenging, but we are very proud of our team and how they continue to navigate the challenging environment. The headwinds we face are transient. Our financial and operational position remains strong to weather them, and we remain confident in our ability to continue to execute against our transformation strategy. With that, I will turn the call over to the operator to start the Q&A session.
spk03: Thank you. We will now start our Q&A portion of the call. If you would like to ask a question, please press star followed by one on your telephone keypad. If you have joined us online, please press the red flag icon. When preparing to ask your question, please ensure that your line is unmuted locally. And our first question comes from Joe Feldman from Telsey Advisory Group. Please go ahead. Your line is open.
spk08: Yeah, hey guys, good morning and thanks for taking the questions. So maybe start with helium. Seems like we're back to that pressure. I guess you did give a deep explanation there, but I guess we were under the impression that you guys had, you know, contracted for much of this. And I guess I'm a little surprised that with all the work that you've done over the past few years that there's now incremental headwind yet again. And I don't know, maybe you could share a little bit more about, you know, you just said the second quarter, 7 million of incremental headwind. But what about the second half? I mean, presumably it's going to be something there. It's never just one or two quarters. So maybe let's just start there.
spk05: Yeah, thanks for the question, Joe. You know, I'd start by saying that the circumstances of this helium shortage environment is very different than it was in 2018 and 19. Back in that time period, we had over 90% of our supply coming from one supplier, and now we've significantly diversified that, and as we've talked about over the past, including our own wells. The circumstances that we described in our prepared remarks were just a compounding set of elements that really forced our diverse supplier base to go on allocation. And consequently, as we worked with them, we really tried to diversify our supply across the country. The good news is we've been able to keep our stores in stock. Our main pressure point for helium is in the second quarter in grad season. That is our peak season. And so as these unexpected pressures suddenly came online, you know, we immediately evolved to ensuring that between our contracts with suppliers which were on allocation, our own wells, and then what we needed to quickly purchase in the spot market to ensure helium for Halloween did add cost to the equation. Our priority has been to ensure that we service our customers to the level that we need to to meet the balloon demand. In the second half, obviously, we continue to do decent balloon business month to month, but graduation season is the peak. And so that's where we expect the most pressure, as we outlined. Understood.
spk08: Okay. You guys talked about the everyday business was a bit weak. I'm curious, what happened there? Because that had been one of the core strengths, like you guys, for much of the past year. You know, even when things were tough around the business, the core everyday business was still pretty solid. Is it just that we're lapping tough comps there? Or, you know, I guess maybe I'll just leave the question there.
spk05: Yeah, so, you know, the first quarter was definitely, as we know, the tale of three different months, right? You know, and overall traffic saw quite a bit of ups and downs, January with Omicron, February returning to really previous trends, and then March, as everyone really experienced in the back half of the month, saw just compounding challenges between inflation hitting consumers more significantly wrapping stimulus, the war beginning, rising interest rates becoming headlines. And so there was overall pressure. Our core everyday business was up, just not as much as our seasonal business. And I would say it was certainly an underperformance to the previous trend, again, driven by softer than expected March trends due to the consumer backdrop. But Balloons and kids' birthday were tougher on a year-over-year basis. Your point was exactly correct, and that is on a two-year basis, they're still exceptionally strong. We're lapping extraordinarily high comps in those two categories. But also, again, favors, candy, solid tableware, as we mentioned, all did very well with the category resets that we executed in those categories. We did not execute the same assortment changes in birthday or balloons, but we, you know, continue to see good two-year trends, just not as good as our seasonal, which bounced back really nicely.
spk08: Got it. That's helpful. Thank you. And then I'll just ask one more if that's okay. Just, you know, with regard to the the consumer, are you guys you mentioned, I think Todd had mentioned that that average value for transaction was up. Presumably inflation was a decent part of that. But like, are you seeing more items per basket? Or? Or was it more just the inflation? And is the consumer actually trading down or starting to buy less because of all the headwinds you mentioned?
spk05: Yeah, our AOV, you pointed it out, our AOV was primarily driven by price increases. And so we're obviously focused on key metrics that demonstrate our increased relevancy, including transactions and average order value. So keeping a close eye, but it's been much more of a transaction challenge. obviously than a price challenge or ALB challenge.
spk08: Okay. Got it. Thank you. And, yeah, good luck, guys. We'll talk more later. Thanks.
spk03: Perfect. Thank you for your question, Joe. Our next question comes from William Reuter from Bank of America. Please go ahead.
spk06: Good morning. My first question is I would have thought that given the fact that the impact of COVID is much lower right now than it was a year ago, that there would have been so many more social gatherings that that would have been a tailwind would have offset some of the challenges that you're describing. Is your sense that there's still a big number of increase of events? And is it just that people are not spending on those events because of constrained budgets?
spk05: You know, I think, yeah, you know, the, I think the bottom line is the stimulus checks that we could never really correlate to our increase in sales last year. You know, we said that we knew that they were having a positive impact, but while others could directly correlate it, we could not directly correlate to the same level. And so, you know, we have seen a pullback in spending You know, it certainly looks like within the economy, those who have pretty decent income levels are not as impacted by inflation, while those at, you know, more moderate income levels are being impacted. So we're watching that closely. Certainly, you know, from a discretionary spend perspective and celebrating during a pandemic time period, You know, that was a very positive impact on our balloon and birthday business, certainly bolstered it. Those were our highest level of comps last year. And, you know, so they have the biggest impact.
spk06: Okay. And then on the issues of helium, given that you are on allocation, what percentage of your helium are you being forced to purchase in the spot markets? And even for your contracted helium, is force majeure in place such that you're really paying spot prices for almost everything?
spk09: So probably a couple of answers to that. First, in terms of our contracts, for the contracts, the vast majority of our contracted volume with distributors is going through allocation at this point. Allocation is impacting the quantity of helium, but not the price of helium from those vendors. So, we are able to maintain price. Where price comes into it for us is when we can't get the quantity or we couldn't get the quantity that we wanted to have to be prepared for graduation season. In those cases, we did go out to the spot market to buy additional helium, which, you know, given the shortage of helium, it was at a premium. Overall, though, to Brad's earlier point, we feel like graduation season is, without a doubt, the peak of balloon volume during the year. And we've set ourselves up to be in stock in our stores and to be able to serve as customers during that important season and sets us up well for the rest of the year.
spk06: Okay, and then just one more on that topic. It would seem, you know, the last caller, Joe, you know, he mentioned the challenge of higher helium and why that wouldn't be an impact for the full year. It would seem to me that when the BLM comes back online in kind of late May or June, that that should be a bunch more volume in the U.S. I guess, do you believe that that's the case and do you expect spot prices will decline from these kind of recent peaks?
spk05: It's really hard to speculate on future spot prices. Our anticipation is that we are like-minded in that the BLM coming back online will certainly add supply and reduce any need. We do not see spot purchases being required beyond Q2 when we look at what our expected supply is even in a little bit of a diminished capacity for the back half of the year. So like we said, the pressure point is really Q2 and other things like BLM should take some pressure off.
spk06: Perfect. That's all for me. Thank you.
spk03: Great. Thank you for your question. Our next question comes from Jenna Gianelli from Goldman Sachs. Please go ahead.
spk02: Hi there. Thanks for taking my questions. Just kind of staying on the topic of helium on the back of Bill's question, on that 97% of stores kind of having helium right now, I guess do you expect that to stay about that level, go higher or lower? And is there any estimate of missed sales? that we should be thinking about for the year from just the helium issue?
spk05: So the helium, when we say 97%, we've had a handful of stores be out of helium over the past few weeks. And it's very spotty. And most of that is not actually driven by a helium shortage. It's actually driven more by... logistics and getting helium to the right places. It's obviously a fairly intricate logistics network. And sometimes you just can't get it to the stores on a timely basis. Those lasted a few weeks. Those are in the past. Certainly they don't have, you know, it's a few days in a few stores. And so measuring the impact of any lost sales would be very challenging. But as of now, we don't have stores that we're anticipating in the near term having those same challenges based on the purchases we've made.
spk02: Okay, cool. And thank you. And then just also, I'm curious, I mean, we've heard this from other retailers, but just in general on the port fees and those being higher than expected in the first quarter, it sounds like the 2Q guide is more top line led than margin led, but I guess are you starting to see those outside port fees come down in the second quarter or are they still kind of staying elevated to the same degree?
spk09: For the port fees in particular, we're managing our way through that so that we're moving the goods as quickly as possible through the ports and that is helping. There still is, without a doubt, the presence of the fees, but it just should be a little bit more mitigated as we go into Q2. So we should be in better position, though not fully solved at this point.
spk05: And a big pressure point in Q1, Jenna, was a lot of people started shipping product to the East Coast. taking some pressure off of the delays in the West Coast. And quite frankly, the East Coast system network just wasn't quite up to the amount of volume that came to it.
spk02: Got it. Understood. Yeah, I guess you guys are certainly not alone in having that happen this quarter. On one kind of final one, when we think about liquidity and working capital, Given the inventory build in the quarter, I guess, how are you thinking about working cap for the full year and cash flow, comfort with existing liquidity? And then just remind us on the tax refund that I just didn't see in the financials. Remind us on the amount and the expected timing, and that's it for me.
spk09: You bet. So first, take the tax refund. We do have $52 million in receivables on the balance sheet. left to come so that tax receivable is out there and it's actually due, pretty much it's already due back to us. So at this point, we're just waiting on the IRS for processing. So that should be near-term cash coming in. In terms of overall free cash flow for the year, clearly with the guide that we have on EBITDA and the higher levels of CapEx this year, We would expect our overall free cash flow to be down for the year versus last year, but net-net, we continue to manage that CapEx very tightly and continue to manage our liquidity very tightly. Working capital, you will see an increase over the course of the year, but that is purely driven by the input costs that are going into our inventory values. So we have, in the course of Q1, a little bit of unit growth as we're buying to get ourselves in stock. But longer term, it's just the capitalized freight costs are in increment to what we would have seen last year.
spk02: Got it. Okay. So a fair way to think about the inventory bump is really just higher input costs and not really units.
spk07: Right. That's right.
spk02: Okay. Okay. All right. Thanks so much. I'll get back in the queue. Thank you.
spk01: Thank you.
spk03: Perfect. Thank you so much, Jenna, for your question. Our next question comes from Carrie Martison from Jefferies. Please go ahead.
spk07: Good morning. You've rattled off a number of headwinds that you're facing, but then you've balanced it with we're being very thoughtful of how we take price and everything else. I mean, it seems like we're not able to or unwilling to price accordingly for all of these headwinds. You know, as we approach peak season for helium, why aren't we pricing for the demand or the cost that we're seeing? And that, I guess, goes across the board for everything.
spk05: So, yeah, a couple things. You know, we said we are always thoughtful customers. about price from the standpoint of every pricing action has an influence on unit sales. And so we've been very consistent approach with any pricing action, testing, reacting, watching our elasticity at the category level and at the SKU level. And so there are elements of you can add pricing, but could it have a a greater impact on the top line. We're very careful to optimize profitability. That's at retail. At wholesale, we did implement price changes in the back half of last year, starting mid-year, and have elevated those through the back half and into this year. Obviously, lead time on price increases versus when purchase orders are shipped is delayed. and delayed just based on the cycle of the business. And so that's why we've talked about our price mitigation having a greater impact increasingly through the balance of the year.
spk07: Okay, so when we think about the guidance here, it is very much a back half weighted and that we see year over year improvement in the second half. versus this kind of myth here in the first half, correct?
spk09: It is definitely second half weighted, and it is really as simple as we are going to be wrapping around on the cost increases that started hitting us in Q3 last year, at the same time that our pricing is really ramping up, particularly at wholesale. So that's correct.
spk07: Okay, and then as we look at inventory and we look at the delays in port, I realize that we've got some time before we hit the key Halloween season, but where are we in terms of getting that inventory into our pipeline?
spk05: Yeah, and at this point, obviously, that's been an evolving situation, as you alluded to, but we are very confident in the flow of Halloween, we already have a significantly larger percent of our product already received or on the water versus last year. And so like last year, we had a solid line of sight to inventory, but it was more delayed. This year, the product is either here or imminent.
spk07: Thank you very much, guys. Appreciate it.
spk08: All right. Thank you.
spk03: Perfect. Thank you so much for your question. Our next question comes from Carla Casella at JP Morgan. Please go ahead.
spk04: Hi. You mentioned that a lot of your Halloween is already either in-house or on the water. Are you still chartering your own ship? Can you talk about the freight rates you're seeing sequentially as you go 1Q into 2Q in the back half?
spk09: Sure. So we definitely are still chartering our own ships. To the extent that we're doing that, we've built up good, solid relationships. We're able to now get those chartered ships to the East Coast, which has been a plus from a transportation perspective from port to our distribution center. And at this point, the overall cost for Those charters going directly from the factory all the way through the costs to our DC have been pretty consistent. And that's how we've built out our guidances to assume that those costs stay relatively consistent overall for the rest of the year. Any improvement would be upside to that guidance.
spk04: OK, great. And then just a clarification on helium. You mentioned that the US plant is 8% of the world's supply. But I think that's to explain that you have the majority of your supply coming from. I'm just wondering if you could give us that percentage or give us a sense for how much of your helium typically will come from or the quarter came from there versus third party versus spot.
spk05: Yeah, it's very diverse. Obviously, the wells that we have provide us with a significant amount Another big component of our supply is Qatar. That maintenance has been completed, and those plants have resumed operations. And so our supply actually comes into our distributors from a number of places throughout the world. They're sourcing everywhere. We're focused a little bit on where geographically their supplies are coming from, but also extraordinarily focused on ensuring between those suppliers and our own wells that we're in the best shape we could possibly be in.
spk04: The well down that you talked about out west, that's not your own well?
spk05: No, that's what I'm referring to when I talk about the wells that we do contract with and have a locked up amount of supply.
spk04: OK. Have you said how much of your supply comes?
spk05: And those are producing very well.
spk04: OK. So have you said how much of your supply comes from the well that's down?
spk09: We haven't. We haven't said specifically what percentages are coming from where. The wells that we're contracting with, just to make sure we're clear on that, are still producing and actually producing at very strong levels. It's really the Bureau of Land Management well in the U.S. that's been the key issue with supply.
spk04: Okay. Great. Price increases, are you seeing your competitors match pricing? Like if we check shelves at Walmart, Amazon, the grocers, and the party goods, are you seeing them raise prices similarly? Or are you seeing any consumers or your wholesalers kind of trade down in terms of products or mix given the price increases as we look into the back half? And I talked more about party goods, but I'm wondering also if there's that dynamic in balloons of the trade down.
spk05: Yeah, I would say it's been mixed as to, you know, by category where people have, you know, taken prices. Obviously, helium impacts the broader market, not just us. And so, you know, in balloons... You know, again, sort of balloons by type. We've also seen a mixed bag where, you know, we haven't seen anybody take prices down to, you know, try to create any significant competitive advantage. I'd say it's been a mix.
spk04: Okay. But the consumer trade down, are you seeing any of that? Or even your wholesale customer purchases trade down to different, I don't know, price points or pack sizes to mitigate?
spk05: No, we haven't seen a significant, you know, I would say trade-down in assortment. The mixes largely stayed, you know, the same because we're not talking about extraordinarily expensive product at a unit level. So not really.
spk04: Okay, great. And then just one last one. Did you give any details on what anagrams year-over-year sales growth was or sales? I know you usually give that in the queue, but I'm not sure if you can give us any.
spk09: It was a strong quarter for Anagram. I think in the queue we'll come out with what the exact numbers were, but double-digit percent growth in sales and also had growth in EBITDA.
spk04: Okay, great. Thank you.
spk09: Okay, thank you.
spk03: Perfect. Thank you so much for your question. This concludes our Q&A session. I would now like to pass over to Brad Weston for any final remarks.
spk05: Thank you, operator. In closing, I'd like to highlight that we are operating in a very dynamic business environment. Note that as consumer spending behavior shifts, they will continue to celebrate. And importantly, we are confident in our transformation strategy, which has produced meaningful results, which will continue to increase our relevancy as the destination for their celebratory spending. Thank you to all who joined the call today, and a special note to all of our team members. Thank you for all your efforts. You make every single day in Making Joy easy for our customers. So have a joyful day.
spk03: Thank you, everybody, for joining today's call. You may now disconnect.
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