Q2 2022 Party City Holdco Inc Earnings Call
Thank you for your patience to Paul P. 50, Q2, 2022 earnings conference call will begin shortly during the presentation you will have the opportunity to ask a question, but its store base by one on your telephone keypad.
[music].
Hello, and welcome to possibly 50, Q2, 'twenty 'twenty earnings Conference call.
My name is Lauren and I will be cool, thanks Newco today.
There'll be an opportunity for questions at the end of the presentation. If you would like to ask a question you may do cycle pressing store makes more one on your telephone keypad.
I would now like to how do you make that your host Eric Warren Vice President Treasurer, and head of Investor Relations to begin.
Eric Please go ahead.
Thank you operator.
Everyone and thanks for joining us.
This morning, we released our second quarter 2020, Chief financial results.
A copy of our press release on our website at Investor.
City Dot 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.
Todd Vogan Sena, 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.
<unk> 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 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.
Or 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'll refer to both GAAP and non-GAAP financial measures of the company's operating and financial results.
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 West.
Thank you Eric.
Good morning, everyone and thank you for joining us today before we begin our review of our second quarter results. It is important to recognize that we had been a definitely managing a broad range of challenges, including the pandemic.
Over the past two plus years and we are confident in our transformation strategy focused on increasing our relevancy with consumers and strengthening our operating structure.
In an unprecedented environment.
Including the <unk>.
<unk> laser focused on our customer.
Nick plus years.
They have with our brands.
Ours and our transformation strategy.
And we will continue to.
And our relevancy with consumers.
And strengthening our operating structure.
Great Joyful celebration.
<unk> and then invite.
So you can imagine.
<unk> been laser focused on our customer.
To create unforgettable memories.
<unk>.
Murray will last a lifetime.
We have been.
With that as context.
The celebration occasion obsessed.
Okay.
All monitors.
First hurting our customer.
And by the continuing broad based supply chain volatility.
<unk>.
We have lowered our.
Increasingly easy to create unforgettable memories.
Outperformance will continue to exceed 2019 led.
Great context.
Putting the consumers' recognition.
Taxonomic environment, we're all monitoring.
Moving their experience.
During by the continuing broad based supply chain volatility.
<unk> two.
<unk> lowered our.
Two top line results largely in line with expectations.
Outperformance will continue to exceed 2019 led.
$7 million.
Will consumers recognition.
The progress we have made improving their experience.
This is on top of a very strong second quarter last year.
Your resulting in double digit sales growth.
In line with expectations generating total sales of 527 million.
Acro factors impacting consumer spending.
<unk> percent year over year.
The pressures rising interest rates.
Year, very strong second quarter last year.
Rates as well as Annualizing last year's stimulus payments.
Your endemic levels.
Our gross margin was below our.
The multitude of macro factors impacting consumer spending.
We navigated the helium shortage I described last quarter.
Okay.
<unk> along with much higher.
The ability.
Linda.
<unk> Hello, it's annualized in last year's stimulus payments.
While these cost headwinds are predominantly transitory.
Expectation.
You got it really impacted gross margin.
<unk> in Q2.
Jim.
We navigated the helium shortage I described last quarter, along with much higher than expected freight costs.
It was $46 million.
Versus $86 million last.
Yes.
US wins are predominantly transitory.
At year three at the.
Minimally impacted gross margin and adjusted EBITDA by approximately $32 million in the quarter.
Inventory early.
<unk> adjusted EBITDA for Q2.
Early or supply chain challenges.
<unk> versus $86 million last.
Jos believe unless we've rebuilt in stocks.
Year Q2.
<unk> slow last.
$77 million.
Year. This additional inventory is evergreen in nature.
Bring in inventory early.
Sure.
Given.
Yes side or the logistics challenges associated with the larger receipt volume.
And the physician to have the alloy.
Yes.
And as we've rebuilt in stocks, which were too low last year.
Let me underscore the temporary nature of incremental.
<unk> in nature.
Costs.
Or seeing any markdown risk.
Beginning with the largest chan.
Risk just to challenges associated with the larger receipt volume.
And to this year.
But about the quality of our inventory.
<unk> costs, but actual conditions and cost.
Tori underscore the temporary nature of incremental cost.
I'm anticipated changes in demand.
I'll begin with the largest challenge.
Our in stocks and wholesale customer service levels.
Coming into this year.
We've received a critical Halloween product.
<unk>.
It caused our receipts to temporarily exceed our distribution center capacity.
In addition to unanticipated changes in demand.
Here's a week process.
Proving our in stocks and wholesale customer service levels.
Product here.
<unk>, ensuring we received our critical Halloween products.
<unk>.
<unk> have caused our receipts to temporarily exceed our distribution center capacity.
Yes.
This creates incremental charges as containers of waste processing.
Tumors needs.
<unk>.
The critical graduation time period.
Clean product here.
<unk> and available for customers earlier than last year.
The outlook for helium.
Your theater.
It is now improved as expected.
Helium costs.
In the U S. The Bureau of land management plant is now up and running.
<unk> meet our customers' needs during the critical graduation time period.
Running in April .
Should spot purchases.
Wine for maintenance earlier in the year.
Supply has now improved as expected.
Here with spot purchases.
<unk> U S. The Bureau of land management plant is now up and running.
As you can see.
<unk> Qatar.
Dropbox the rest of the year.
<unk> patients in April .
The majority of the impact is behind.
<unk> maintenance earlier in the year.
And as previously discussed.
Year given this.
<unk> significantly diversified our helium supplier base.
<unk> balloon demand peaks dramatically congratulation season.
So as long term supply agreement.
The rest of the year.
<unk> improved our ability to source.
<unk> Act is behind us.
Moving to sales.
Previously discussed.
This environment of shifting consumer demand.
Just find our helium supplier base.
In one category.
Base full well partnerships.
He killed.
In term supply agreement.
<unk>, 6%.
That's meaningfully improved our ability to source helium.
I, 0.6% or an increase of 12, 2% versus 2019.
Helium consumer demand.
Categories are performing very well against pre pandemic levels, while being more challenged versus last year's strong performance.
<unk> percent with brand comparable sales decreased five 6%.
<unk>.
Piece of 12, 2% versus 2019.
<unk>.
Our core categories are performing very well.
Sure.
Against that mix levels.
Differentiator in our strategy.
<unk> versus last year's strong performance.
G seasonal businesses.
<unk> compared to 2019.
Is Q2.
<unk> business in particular.
Two biggest with Easter.
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Thursday.
About 60%.
<unk> fried.
Due to the emphasis we put on this category as a key differentiator in our strategy.
<unk> businesses I just mentioned.
Our seasonal businesses.
30%.
<unk> performance in Q2.
<unk> sales were up one 3% versus.
Versus prior year.
<unk>.
Fathers day.
<unk> versus 2019.
Hey duration results.
Our comparable sales in core categories.
In aggregate the seasonal businesses I just mentioned.
<unk> 21.
Only 30%.
One 1%.
<unk> overall seasonal sales were up one 3%.
So on driving improvements in quality and innovation.
Versus 2019.
Sure.
As well as thoughtful pricing as we seek to offset higher expense.
Five 5% in the quarter versus 2021.
Uhm.
21% versus 2019.
Jim well, driven by new product innovation and higher priced items.
In innovation.
Items customer demand for products that make their celebration.
<unk> as we seek to offset higher expenses continues to strengthen performed.
<unk> has remained up significantly compared to 2019 levels.
Thats for us performed very well.
Versus 2021.
Innovation in higher priced items.
One business was impacted by helium constraints in select markets.
Items.
Unique and special.
<unk> mitigate the shortage compared to previous years.
<unk> remained up significantly compared to 2019 levels.
<unk> Barry outages.
Go back versus 2021.
Our balloon business was impacted by helium constraints in select markets.
<unk> and travel.
Our team was able to mitigate the shortage compared to previous years.
Through a stronger supply network.
<unk> leveraged our full omnichannel capabilities.
Work outages.
<unk> sort of each of our channels.
<unk>.
Provide customers flexibility.
Agrees like birthday.
Be well.
They acted by an increase in travel and away from home celebration.
Hello.
Compared to 2021.
Nearly 13% of our retail sales in the quarter.
One capability.
<unk> you did deliver an enhanced customer experience.
These provide customers flexibility and the convenience of multiple.
<unk> June .
All options.
Your answers on our mission of moving from selling party products.
<unk> represented approximately 13% of our retail sales in the quarter.
The digital experience that shifts from the transaction.
<unk>.
<unk>.
Through new digital capabilities.
Two an inspirational and empowering celebration building.
Since our mission of moving from selling party products.
<unk> a strong three five conversion rate, which will only accelerate with continued optimization.
<unk> that shifts from a transactional experience.
Builder continues to build.
<unk> to an inspirational and empowering celebration builds.
Minto homebuilder visits for graduation season.
Executing a very strong three 5% conversion rate.
The balloon.
Right. So you celebrate with continued.
<unk> continued to improve.
Bluefield, there continues to build momentum.
<unk> for the.
We experienced a 150000 total balloon builder visits for graduation season.
Sales growth of 13% driven by two factors.
Food sales.
<unk> first.
Our conversion rates and <unk>.
Listing customers.
<unk>.
<unk> product supply position improves.
For the experience.
Our wholesale shipments to Canadian tire.
A business.
<unk> do accelerate as we invest in our partnership with.
<unk>, 13% driven by two factors.
Through the back half of the year.
We experienced growth with existing customers.
Challenge.
<unk> applied position improve.
As Vincent airfield the loan portfolio.
The entire.
So strategically expanding since 2018.
<unk> ownership with them.
Within our wholesale segment.
Through the back half of the year.
And delivered growth.
On a standalone base.
Year, partially offset helium challenges.
There's some softening.
Our expansive airfield the loan portfolio, which we have been strategically expanding since 2018.
<unk> growth in the second half of the year.
Within our wholesale segment.
<unk> duration.
And as Graeme business again delivered growth on a standalone base.
The entire <unk>.
Graham did experience some softening.
Some customers that experienced.
Supply chain.
Sell through level flat.
Just expect continued wholesale sales growth in the second half of the year.
The reposition of the celebrations.
<unk> growth from our traditional customer base.
Space.
Increasing Canadian tire business.
Sourcing capabilities.
<unk> seen orders from customers that experienced.
<unk>.
<unk> unprecedented sell through levels last season.
Knowing they are driven to different retailers.
Here uniquely positioned in the celebration space with unrivaled consumer insights manufacturing asset.
Selling solutions.
That leverage our deep understanding of the consumer.
Broadly serve consumers where they shop.
You are able to offer our.
They are driven to different retailers for specific shopping.
Nic solution.
Meet the needs of their customers.
<unk>.
<unk> and complement their bids.
Branded selling solutions.
Sure.
<unk> leverage our deep understanding of the consumer.
Jones Party impressions.
<unk> result.
<unk> used to the market in Q2.
Wholesale customer base.
Two responses met our.
This solution.
It's beginning to secure.
<unk> and their customers.
Tests into these efforts will begin primarily in 2023.
<unk>.
As we seek to learn from our test.
<unk>.
Test and expand accordingly.
Were introduced to the market in Q2.
Like all of our channel.
The initial response has met our expectations.
Handles to create margin opportunity.
<unk>.
These without compromising our leadership position.
Marilee in 2023.
As we seek to learn from our tech.
Another significant round of strategic retail increases.
Tests across all of our channels.
Both sales.
You need to utilize our pricing power to create margin opportunities.
<unk> the gate to improve profitability amidst these short term challenges.
<unk> some space.
Is focused on our customer experience.
<unk> implemented another significant round of strategic retail increases and have been pleased with both sale.
<unk> stores.
<unk> and impact.
<unk> continued to perform very well.
Even as we navigate to improve profitability amidst these short term challenge.
159, nextgen stores as of the end of the quarter.
<unk> proven to fortify our operating.
Order a mid single digit sales increase.
And our next Gen store.
Kris.
<unk>, which continued to perform very.
Back period on each store.
Well the next Gen stores in Q2.
Sure.
Totaling 159, nextgen stores as of the end of the quarter.
280 to 195 Nextgen store.
<unk> digit sales increase.
Or it was in the chain.
<unk> closed stores.
Same store than our initial 200.
The payback period on each store.
We are more tightly managing capex.
Sure.
And expenses.
Anticipate ending 2022 with 180 to 195 Nextgen store.
There's still actions.
There are openings in the chain.
By chain challenges.
Our initial 200 stores by year end.
There's still inventory planning capabilities.
<unk> Capex.
And then supply forecasting improvement.
Next half of the year, given our revised outlook.
We are also adding new talent.
And it'll actions.
It's being supply chain function.
<unk> supply chain challenges.
Additionally.
Is product visibility.
Lee, but new data.
<unk> inventory planning capabilities.
It will improve our <unk>.
Forecasting improvement.
So the activity.
<unk> capacity.
<unk> relates to ESG.
<unk> also adding new talent.
<unk> is our initial environmental social and governance report.
Additionally.
Port.
<unk>, we continue to implement new data.
Right.
Putting platforms.
In the report we will outline our priorities.
<unk> six.
Org, which stemmed from our initial priorities assessment.
Mr ESG.
But it's into each of our major.
<unk> initial environmental social.
Advancing our ESG program.
Titled.
Graham do you believe will drive meaningful value.
All of our stakeholders.
Chip report, we will outline our priorities.
We are ready for.
Priorities assessment.
And remain cautiously optimistic.
<unk> our major initiatives.
It will have an improved year over year experience for the consumer.
Lives.
<unk> planning to operate 130 to 150 Halloween city stores this year.
Year, which is up from last year's 90 stores.
We are ready for the important Halloween season and remain cautiously optimistic.
In line with our expectation.
<unk> proved year over year experience for the consumer.
<unk> related cost pressures.
130 to 150 Halloween City stores this year, which is up from last year's 90 stores.
Paul we continue to navigate the dynamic operating environment.
Both were in line with our expectations.
What is in our control.
<unk> continues to face elevated cost pressures.
Joel allergies, and the ability to deliver long term sales and earnings growth.
The macro environment continues to evolve.
<unk> results are not where.
All navigate the dynamic operating environment.
You need to be higher than they were prepaying.
In our control.
Once we have phase.
We remain confident in our strategies and ability to deliver long term sales and earnings growth.
Fired customers and make it easy for them to create unforgettable memories in ways no one else can.
<unk> sales continued to be higher than they were pre pandemic.
Ken.
Despite the headwinds we have faced.
We have a unique and powerful position in the market.
And continue to make against our transformation strategy.
Kit and make it easy for them to create unforgettable memories in ways no one else can.
<unk> is serving us well in building that party city brand for the future.
Now more than ever.
And now I'd like to turn the call over to Todd.
Progress we have made.
Second quarter results.
They'd start transformation strategy.
<unk> greater.
Elements with consumers and strengthen our operating structure.
Right.
<unk>, serving us well in building the party city brand for the future.
Key highlights of our second quarter results and then I'll discuss how we're approaching the remainder of.
<unk> results.
Full details regarding our financial result.
<unk>.
Those are to our earnings press release, and the accompanying slides, which are available on the Investor Relations section of our website.
Today I'll focus on the key highlights of our second quarter results and then I'll discuss how we're approaching the remainder of.
Experienced continued cost headwinds that pressured the bottom line.
Please refer to our earnings press release, and the accompanying slides, which are available on the Investor Relations section of our web.
Benefiting from the continued execution of our transformation.
In line with our revenue expectations, while we experienced continued cost headwinds that pressured the bottom.
<unk> versus the prior year peer.
The volatile backdrop.
<unk> driven by lower retail sales.
Strategic initiatives.
<unk> wholesale sales.
Fitting from the continued execution of our transformation strategy.
So 6% versus last year, driven by lower sales of products in our core categories.
One 5% versus.
Or is the whole inflationary impact on consumers.
Versus driven by lower retail sales.
<unk> comparison period.
By higher wholesale sale.
<unk> began to lift last.
Sales net sales decreased four 6% versus last year, driven by lower sales of products in our core categories.
Year select core categories.
<unk> pro level of inflationary impact on consumers.
Seasonal categories.
Think of a strong comparison period.
<unk>, which was up over 5% versus the prior year.
<unk>.
Brand comparable sales decreased five 6% year over year due to the softness in select core categories.
We offset by solid performance in our seasonal categories, including graduation.
Year, it's in our Canadian business.
<unk> over 5% versus the prior year.
For the second quarter decreased approximately 670.
Here is 13, 2% versus the second quarter of 2021.
Base labor.
Simply due to higher sales to franchise customers as well as strong performance in our Canadian business.
<unk> main pressures many of which are transitory in nature.
This quarter decreased approximately 670 basis.
Sure.
Base from the prior year period.
At least at this point.
<unk> driven primarily by Craig.
So the helium costs.
<unk> costs increased.
And the approximate 150 basis.
Since these inflationary and supply chain pressures many of which are transitory in nature.
So we continue to take pricing across the business, which.
<unk> 660 basis points.
Which missionary pressures in the quarter.
Points, only helium costs in the quarter, representing an approximate 150 basis points headwind versus prior year.
<unk> operating expenses were approximately $151 $2 million or.
Year, since which served as a sizable offset the inflationary pressures in the quarter.
Or prior year.
Approximately 350 basis points of benefit in the quarter.
<unk>.
<unk> growth.
Adjusted operating expenses were approximately $151 2 million or.
Operating income.
Or kind of net sale.
$9 million in Q2 last.
Sales to prior year.
At year, adjusted EBITDA was $45 $8 million.
<unk>.
Wage rate growth.
And the $5 8 million last year.
Growth as a result.
And second quarter adjusted earnings per share was <unk> 10.
Compared to operating income.
<unk> 99 in the prior year period.
Two last year.
Adjusted EBITDA was $45 $8 million in the second quarter compared to $85 8 million last year.
But as a result.
Year and second quarter adjusted earnings per share was <unk> 10, compared to adjusted earnings per share <unk> 29 in the prior year period.
<unk> nearly breakeven GAAP pre tax income as implied in our guidance.
Got it.
Our annual tax rate is significantly above.
Our second quarter results.
Norm.
In accordance with GAAP.
It was timing driven $174 million benefit to our net income.
Two due to the nearly breakeven GAAP pre tax income as implied in our guide.
<unk> expense in future periods.
<unk> significantly above normal.
<unk> expense of approximately $12 million to $16 million in 2020.
Normal driven $174 million benefit to our net income in this period.
To put note.
Which we filed with the SEC this.
Would you be offset by tax expense in future period.
Morning, heat and cash flow metrics.
<unk> annual tax expense of approximately $12 million to $16 million in 2022.
[noise] metric, 59% year over year, but.
Two disclosure in our second quarter 10-Q tax footnote.
But 19.
<unk> filed with the SEC this morning.
Jim given the continued broader supply chain challenges, we strategically brought in inventory early.
Morning, Tori was up approximately 250 million.
Early and to rebuild our in stock levels.
And or 14% versus the second quarter of 2019.
Level, 5% of the higher inventory levels associated with inflation.
<unk> other supply chain challenges, we strategically brought in inventory early to ensure that we're well positioned.
<unk>, we feel good about the quality of our inventory.
Builder in stock level.
Tore this is ernie categories.
Levels last.
Such as kids birthday, and solid tableware.
Year inventory levels associated with inflation.
Where do not carry high markdown risk as a result.
<unk> Bye earlier Halloween receipts.
Year to date net cash used in operating activities was $99 1 million versus net cash provided by operating activities.
And solid tableware.
8 million.
There are all largely evergreen in nature and do not carry high markdown risk as a result.
An increase in working capital levels as well as the decline in opera.
Creating activities was $99 1 million versus net cash provided by operating activities.
He's a $13 eight.
Current inflationary trends as well as the challenging consumer backdrop.
And by an increase in working capital levels as well as the decline in operating results.
And exciting.
As a reminder, our guidance does not assume any impact from situations, we cannot reasonably predict with any certainty such.
<unk> scenario trim.
As variance.
So as the challenging consumer backdrop and expected continued supply chain pressure.
<unk>.
We are updating our 2022 guidance.
<unk> does include what we've seen so far in terms of the macro backdrop, along with the mitigation measures we put into <unk>.
<unk> such as.
Place.
Good <unk>.
So go 2022 we now expect.
<unk> or other.
Back to the 215 billion to two to two $5 billion or a change of approximately negative 1% to positive 2%.
The mitigation measures we put into place.
<unk> brand comp in the range of approximately negative 4% to negative 1%.
Net sales of $2, one 5 billion to two to two 5 billion or a change of approximately negative 1% to positive 2% versus 2021.
In terms of capital expenditures.
So a negative 4% to negative 1%.
Yours, and $95 million to $105 million range.
<unk>, a 36 million to $10 million.
Range $75 million net of tenant improvement allowance.
170 to 200 million.
While we expect to complete between 85 to 100, New next generation stores in 2022.
And to be in the $95 million to $105 million range.
To our EBIT.
Approximately $65 million to $75 million net of tenant improvement allowances.
Guidance there are three main elements.
We now expect to complete between 85 to a 100, new next generation stores in 2022.
Element.
To help with bridging the change in our EBIT guidance versus the previous level of 235 million to 265 million.
Included in our second.
22 sales assumption is our sales trends consistent with our second quarter rate.
That's lower than expectations.
And third.
Approximately $25 million of higher than expected.
In the second half of 2022.
<unk> in the second half of 2020.
To 2022 sales assumption is sales trends consistent with our second quarter rate versus 2019.
To Miss expectations.
And third approximately $25 million of higher than expected inflationary and supply chain cost impacts in the second half of 2022.
<unk> third quarter total company sales to be flat to slightly lower year over.
Two as well as higher freight expense than previous expectations.
Year.
<unk>. In addition to this outlook, we also want to provide some color on the third quarter.
Drivers that the business is facing versus 2019.
We expect third quarter total company sales to be flat to slightly lower year over year.
<unk> dental supply chain costs.
Year rate in the low single digit range.
<unk> and demurrage.
Range now stepping back to help frame the biggest 2022 cost drivers that the business is facing versus 2019.
All against 2019 levels.
<unk> of approximately $90 million in incremental supply chain costs.
Inclusive of higher freight costs and <unk>.
When and to what extent they will revert.
Average metal material input costs and $10 million of higher helium.
<unk>.
Makes sense again.
<unk> ended the quarter with $195 $9 million in total liquidity.
<unk> clearly transitory.
<unk> $9 2 million in cash.
Corey with certainty when and to what extent they will reverse.
<unk>.
Bubbles.
At quarter end, we had a principle balance of debt net of cash of 144 7 billion.
$9 million in total.
<unk> liquid.
Sacro economic factors impacting the business.
<unk> and CAD.
Business there currently.
<unk> hundred $56 7 million of revolver availability.
At quarter end.
Currently if you run the business prudently.
Disciplined manner.
And for $4 7 billion.
But a number of additional levers that.
The continued macroeconomic factors impacting the business, we feel comfortable with our current liquidity.
<unk>.
And Stuart sufficient to run the business.
<unk> revenue driving project spend.
Business, we do continue to run the business prudently and in a disciplined manner, but if necessary we have a number of additional levers at our disposal to further enhance liquidity, including.
So if our anagram first and second lien notes.
<unk>.
So that will allow for an unsecured intercompany loan of up to $22 million, we made from anagram to the party city credit group.
Also this.
We will provide the party city creditor group with enhanced.
Morning, solicitation with the holders of our underground first and second lien notes.
Slipped instruments in the bid.
Notes will allow for an unsecured intercompany loan of up to $22 million, we made from anagram to the party city credit group.
Business half of anagram first and second lien.
Citi credit group with enhanced.
Notes the company units credit.
Look forward, our strategic priorities and ongoing investments in the business.
<unk> already Citi credit group.
The consent solicitation.
And the performance of the broader.
With institutions holding approximately half of anagram first lien second lien notes.
Facing an operating environment that remains challenging as cost headwinds persist.
Notes the anagram credit group on supporting the party City credit group.
Importantly.
Operations.
<unk> is the headwinds that we.
<unk> Party city busy.
Our temporary.
We remain encouraged in our ability to weather the storm and we continue to make meaningful progress.
<unk> cost headwinds persist and the company has faced with inflationary pressure.
Yes of course, our position of authority when it comes to.
<unk> headwinds that we in.
<unk>.
And the industry are facing are temporary.
To start the Q&A.
We're encouraged in our ability to weather the storm and we continue to make meaningful progress on our strategic initiatives.
Session stoffel each by one on your telephone keypad.
Of course, our positioning of authority when it comes to celebration.
Okay.
<unk> with that.
Having to ask your question. Please ensure that your exciting lately.
We will push for amendment to allow questions cheaper you participate.
If you would like to ask a question. Please press star followed by one on your telephone keypad.
You changed your mind, Please press star fish.
Ken <unk> from Bank of America William Please go ahead.
It looks like it lately.
Good morning.
Most of our maintenance Hello question cheaper you purchased.
The strong wholesale sales.
Do you think that this was early orders.
Next question comes from.
<unk>, who similarly to yourselves and the retail business, we're trying to make sure that they were in good position and where their sales that were pulled forward from the third quarter.
One question on the strong wholesale sales.
<unk>.
I think that this was early orders from customers, who similarly to yourselves and the retail business. We're trying to make sure that they were in good position and where their sales that were pulled forward from the third quarter and if so how much might that have.
Please that they'll continue to increase we had goods.
<unk> has performed.
Across the franchise.
An independent stores.
<unk>.
We have strengthened.
<unk> to receive.
Our partnership with Canadian tire.
These timely.
And sales are increasing.
Lead party city stores.
They'll continue to do.
<unk> Colo Halloween.
Yes.
And yet shipments.
And across the franchise.
<unk> drug in.
Then.
<unk>.
They are excited to receive.
<unk> sales are also.
<unk> on a timely.
Also.
This year as our our party city stores.
So the retail results.
All of Halloween, yet so we still have Halloween shipments.
And then.
<unk> III drug and mass businesses.
Headwind this year in terms of supply chain costs.
We're also.
Some of those like the higher product cost.
So it's a good counterbalance to.
Cost of next year.
Retail results.
Here such as freight cost.
Maybe helium have come down.
And then.
You talked about a $90 million headwind this year in terms of supply chain costs.
Do you have an expectation.
It's like the higher product cost of 50, that's probably not something that changes next year, but some of these such as freight costs.
A point to nail down.
Costs come down.
But it might happen in 2023, so we're kind of resisting giving guidance on exactly how much of that might come back in.
How much of that May decline next year.
And when you look at freight cost of the 90 million.
Year difficult at this point to nail down.
And a lot of which are actually indexed.
23, so we're kind of resisting giving guidance on exactly how much of that might come back in next year, but.
So we feel the pressure of those costs as we go across the rest of 2022 for sure.
But the.
Sure.
<unk>.
Lot of which are actually index.
Our inventory at this point.
And then the helium costs there are a lot of trends.
Really the hope is we see some relief just when and how much is.
So across the rest of 2022 for sure.
<unk>.
Those costs are.
As for.
A lot of them are embedded in our inventory at this point.
I'm sure that it varies tremendously by category, but is there any way to give us any sense of the magnitude of those.
Right.
The changes in our sales of those categories with regard to elasticity.
And then just lastly for me in terms of the June price increases.
The city reaction to prices.
It tremendously by category, but is there any way to give us any sense of the magnitude of those.
Hum.
And any changes and sales of those.
We have a good understanding of price elasticity is.
<unk>.
The category.
Consumer reaction to prices.
Sure.
<unk> really.
<unk> pricing we're encouraged by.
We're constantly.
Our but we're being judicious.
<unk> and.
In this environment, we've not seen.
And understanding of price elasticity.
Ah versus what we had.
Is.
At the SKU level as well as competition.
Ben over the last.
<unk> pricing we're encouraged by.
<unk> pushed prices to the proper threshold.
Being judicious.
Hold especially given.
This environment, we have not seen them.
<unk>.
Material change in elasticity.
Versus what we had been.
It was long lasting.
Despite.
To consumers be over.
Dean.
Competitive pricing that we.
Our proposition.
<unk> prices to the proper threshold.
<unk> pricing actions in the back half of the Europe .
<unk> cost pressures as.
<unk> view of price elastic.
We do not want to.
<unk> positive dollar.
<unk>.
<unk> profitability.
The consumer's view of our price value.
Todd Thank you very much that's all.
<unk>.
We're willing to take additional pricing actions in the back half of the Europe necessary.
My question comes from Jason Feldman from Telsey Advisory group.
Great.
A positive dollar.
Great.
<unk> profitability impact.
Yeah, Hey, good morning, guys.
<unk> grabbed Todd Thank you very much that's helpful.
And maybe first start with can you explain the new.
That new $120 million in borrowings that you guys are doing I guess I'm not fully understanding that it would appear that.
Hey, Pat.
We're concerned about liquidity in the second half of the year, then I guess.
Yeah.
Couple.
Because based on the.
First start.
No.
Can you explain the new that new $120 million in borrowings that you guys are doing I guess I'm not fully understanding that it would appear that.
<unk> got a little bit the new $120 million in borrowing.
For the year, then I guess.
Or you can clear your heart.
The Chile side based on the <unk>.
IPL.
<unk> commenced the solicitation agreement with anagram.
Oh I'm.
Im sorry, borrow 120 million.
And you might need.
Oh It was 22.
$120 million in borrowings.
Clearly I did.
Clear youre, referring.
$22 million, where we're essentially just taking.
Patient agreement with anagram.
Sure.
Rose 120 million.
<unk>.
Yeah.
It was 22.
Okay, sorry about.
Hopefully I didn't.
Thanks for clarifying yeah, that's the line keeps cutting out today and I apologize, maybe it's my phone, but I.
Ms cash that excess cash at <unk> and moving it over to party city.
I think I guess I'm curious with regard what's your current thinking on Halloween guys.
Okay, sorry about that.
Guys.
Yeah. Thanks for clarifying the line keeps cutting out today and I apologize, maybe it's my phone, but I.
The plan for.
Cash was clear, but not not the phone anyway.
This as we said in the.
I guess I'm curious.
Just really optimistic that Halloween.
Halloween.
Something people are excited.
Guys.
Great.
Assuming.
Are you, assuming it's a down Halloween again.
Bush because of the year over year improvements we've made.
On our Assortments.
Yes, as we said in the.
<unk> marketing.
Cautiously optimistic that Halloween.
And market appreciation.
Something people are excited to celebrate.
<unk> product.
Great.
The stores with late last.
This year I'm bullish because of the year over year improvements we've made.
Year for Halloween, we also believe there.
In store merchandising or marketing.
There are some last year.
And digital experience our go to market approach is really our best.
Year Dow customer.
The product delivery to stores with late last.
Asked around Monday.
Here, we're encouraged by early demand.
Versus.
For Halloween, we also believe there.
Our own.
There is potentially some pent up demand from last year.
One in Halloween.
And we've noted high sell throughs from from wholesale customers.
There's the whole weekend.
<unk>.
The question is always asked around Monday versus.
Right.
Drive a lot.
<unk> data that's available at a national level as well as our own.
Out of it.
One generally suggests that a Monday Halloween.
A real bright spot for us.
They Halloween.
Thus.
Consumers appear.
We intend right.
To be certain operations that they.
The parties.
Miss.
The.
Drive a lot.
Mrs.
Sort of.
Young adult Halloween activities.
For Halloween city pop up store.
These categories have been a real bright spot for us thus far this year.
<unk> and from 90, a year ago.
<unk> spending for seasonal celebrations that they.
450, this year puts us in a much stronger position.
And I would just add that.
750 Party city chain stores.
So these pop up stores.
Has dramatically improved and the expansion from 90 a year ago.
Doors.
<unk>.
Up to 130 to 150 this year puts us in a much stronger position.
Then even just the 750 party city chain stores.
I'm just <unk> Martinson from Jefferies. Please go ahead.
Mhm.
Good morning.
When you look at the traction that you have here in the third quarter and the price increases that you took in June .
Somewhat surprised by the low single digit EBITDA margin on the guidance.
Go ahead.
Does your thought process here that we're going to be just very fourth quarter weighted in terms of delivering the year.
The third quarter and the price increases that you took in June .
Somewhat surprised by the low single digit EBITDA margin on the guidance.
Your costs actually slowing through.
<unk> is going to be just very fourth quarter weighted in terms of delivering the year.
Having to move through containers that are distribution center those costs are hitting us now.
Sure.
I think also we're getting the timing of some of the freight costs actually slowing through.
Now.
When we talk about some of the things that Brad talked about.
John .
Having to move through containers that are distribution center those costs are hitting us now.
Sure.
Hi.
When really.
Both.
<unk> Uber hits with Halloween.
The cost of source to process.
And.
Process, all the freight and so.
And when you look at the liquidity of nearly 200 I understand.
Let's get into a more normalized.
And.
<unk> structure.
This that we're moving over from anagram.
October hits with Halloween and dollars fall through to the bottom line very quickly.
<unk> is the parent box correct.
Okay.
And when you look at the liquidity nearly 200 I understand.
<unk>.
And we look at that number.
Your working capital needs, having brought in I think you said, 15% more of the seasonal where do you guys see yourselves ending the year here on liquidity certainly understanding that this is a.
Transitory year for you.
So when you look at.
Your working capital needs, having brought in I think you said, 15% more of the seasonal where do you guys see yourselves ending the year here on liquidity certainly understanding that this is a.
Transitory year for you.
With our EBITDA guidance of 170 to 200.
To describe it.
Hi.
Okay.
Here, we would expect to be not positive on free cash flow it'll end up being lower than last year, but.
Clearly.
With our EBITDA guidance of 170 to 200.
It'll end up being.
Thank.
Hi.
This year, we would expect to be not positive on free cash flow it'll end up being lower than last year, but.
Caller. Please go ahead.
And at a comfortable level.
First just a follow up on Chris.
22 million.
Okay. Thank.
And that you're asking to transfer.
Extreme.
But the cash that's there now like is there a restriction on transferring the cash that's there now and if there are.
Okay.
And is it.
First just a follow up on Chris.
22 million.
But the target is that cash move as far.
Is that on top of the cash is there now like is there a restriction on transferring the cash that's there now and if there are.
Sure.
And is it.
And just the downhole that it just happens to be the amount that the <unk>.
20, threes are gonna be due.
It kind of what the target is that cash move as far.
Just cash within the system then.
<unk> actually.
In fact that we did have excess cash sitting at anagram that.
A coincidental that it just happens to be the amount that the 2020 threes are going to be.
A lot of the initiatives that need funding on the party city side.
Just cash within the system then.
Cash.
And the fact that we did have excess cash sitting at anagram that was within the box of anagram since a separate credit group.
And.
<unk>.
And that we have a lot of the initiatives that need funding on the party city side.
At this point.
The chance to take advantage of that excess cash and put it where it can can go to its best use.
Hi.
As most people probably can appreciate.
Please just refinance all of those.
Please.
On a three and give more data at amp anagram or was that not available at this point.
I wanted to make sure when we refinance those notes that we do at favorable terms that we.
<unk>.
Something that can be a good long term sustainable structure and haven't quite found that yet.
The most awesome market for financing right.
Yes, just to address the $22 million.
Now.
And then.
We're wanting to make sure when we refinance those notes that we do at favorable terms that.
Okay, Great and then I have a follow up on inventory.
<unk> structure and haven't quite found that yet so.
Have any level we've seen.
For expeditious just to address the $22 million.
<unk>.
Then.
We felt that kind of a level.
<unk>.
When do you expect the inventory peak.
Hit it because of the pull forward of Halloween.
$671 million.
It's way above any level, we've seen since.
You have hit it.
Since 19.
That was the last time, we saw that kind of a level.
At this by as much.
Inventory peak.
And largely.
Because of the pull forward of Halloween or is that still to come in <unk>.
Orders to make sure that we got or our core inventory back in stock.
Okay.
The inventory coming in for Halloween.
Talk to a large degree so I would say from a.
Largely it was either in transit or on.
We have hit that.
As well.
To make sure that we got our core inventory back in stock at the same thing was either.
Level percent since 2019.
So I would say from.
Store, so I'm just curious how much of that.
We have hit that level.
It is cam cost also baked in that 60% increase.
And then one follow up on that business building and as you mentioned, it's up 60% since 2019.
Great.
That's great and you can see it in the store so I'm just curious how much of that.
Prices.
Is price and if there is any helium cost also baked in that 60% increase.
Great I don't have an exact inflation number.
The increases is really.
Sure.
Sales driven not helium cost.
Sure.
Just when we've taken our prices.
The fairly in the lab.
<unk>.
Balloons.
<unk>.
To some degree.
<unk>.
I don't have an exact inflation number.
Karla.
But suffice to say.
Demand.
The area, where we are differentiated.
It's fairly.
Great. Thank.
<unk> elastic.
<unk>.
<unk>.
We manage to.
The right level of price increases.
Please go ahead.
<unk> really impacting demand to create a degree.
I had two questions. One I was wondering if you could tell us where liquidity fans today, because it's probably a little bit more compressed than where you ended the quarter with my guess.
Great. Thank you.
Question comes from Hale Holden from Barclays. Please go ahead.
I recently.
Thank you good morning.
Two questions. One I was wondering if you could tell us where liquidity fans today, because that's probably a little bit more compressed than where you ended the quarter with my guess.
We did bring down our liquidity in the.
We haven't done to bring down our liquidity for today, but we did.
Recently.
And third week of July versus where we ended the quarter.
We had expanded our.
Okay. Thank you.
Under our ABL when we did that we did it bring down on our liquidity.
I'm just trying.
The party city credit groups liquidity very similar when we did that bring down.
Slightly ever arise.
So versus where we ended the quarter.
For retail in the back half of the year.
Thank you.
Are you seeing.
The second question I had was.
Collins.
That's sort of offsetting the price increases that you are taking to get from a negative comp.
Versus.
Or.
Right.
Sure My parcel out together.
Pop outlook for retail in the back half of the year.
Sure.
Yeah.
No.
Tim.
We're focused on.
Are you seeing traffic volumes.
Sort of offsetting the price increases that you are taking to get from a negative.
Patrick transactions average order value AUR.
Kind of parcel out here.
Yeah.
Increases had been.
Wade into higher average.
Sure.
Average.
Really focused on.
Given the price actions.
Across.
<unk> taken.
<unk> metrics that demonstrate our increased relevancy.
And inflationary pressures.
The average order value of EUR 18.
And move through the back half.
It had been.
Just the fact.
The average unit retail and <unk> given the price actions.
Martin.
<unk> again.
And since we've continued to raise retail price.
Recently.
<unk>.
Inflationary pressures and pricing does become more relevant.
As increases.
So as we move towards the back half of the year due to the fact that we'll have.
<unk> back half so we've been focused on those pricing.
Some Pos margins.
The increase we've also looked at pricing across.
<unk> recently.
Crop.
Soon.
And income.
Increases.
<unk>.
<unk> are more heavily weighted.
<unk>.
Two shipments.
In the back half so we've been focused on those price increases across categories.
National footprint on all different sorts of markets are you are you seeing bigger swings in different income demographics.
<unk> income.
Fix this one of the strongest.
The demographic.
Discipline in our sales results.
Opex was actually going to ask on that last point.
<unk>.
I have sort of a national footprint on all different sorts of markets are you seeing bigger swings in.
Is it their average median household income.
<unk> outperformed.
The strength that we've seen in our.
Households.
Are those results.
Look at this.
<unk> is consistent with what broader retail has.
On the five stores that allow for.
<unk> and geographic geographies that have.
Or.
Higher average median household income consistently outperformed.
Mentioned.
Average median household.
<unk>.
We look at this on a <unk> basis.
<unk>.
So that we can segment and identify stores that allow for.
The focus on.
Dress differently.
King.
Tumor neo.
In the summer looks for value.
In this environment.
<unk>.
As an example, as I just mentioned.
<unk> how are you doing our marketing on our website.
And take more surgical price changes.
So much.
As we've taken that into account, it's allowed us to change.
The focus on our our marketing.
Today, So now since you pack types of breath waiting for closing remarks.
Register value in our marketing on our website and our stores.
Thank you Laura.
How much.
Oren before exiting the call.
Paul I'd also like to recognize the hard work and resilience of the entire P. C. H I T.
So I will now hand, you back types of Barclays for closing remarks.
The success of our business have a joyful day everyone.
Thanks.
Thank you Lauren.
Before exiting the call.
Everyone. Thank you for joining you may now disconnect your lines.
<unk> and resilience of the entire <unk>.
Yeah.
Yeah.
Okay.
Sure.
[music].
Okay.
[music].
Yeah.
Yes.
Okay.
Okay.
Yeah.
Okay.
Thanks.