Party City Holdco Inc.

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.

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.

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.