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Edited Transcript of PRTY earnings conference call or presentation 28-Feb-19 1:00pm GMT

Q4 2018 Party City Holdco Inc Earnings Call

Elmsford Mar 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Party City Holdco Inc earnings conference call or presentation Thursday, February 28, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Daniel J. Sullivan

Party City Holdco Inc. - CFO

* Ian Heller

Party City Holdco Inc. - VP & Associate General Counsel

* James M. Harrison

Party City Holdco Inc. - CEO & Director

* Ryan T. Vero

Party City Holdco Inc. - President of Retail

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Conference Call Participants

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* Curtis Smyser Nagle

BofA Merrill Lynch, Research Division - VP

* Joseph Isaac Feldman

Telsey Advisory Group LLC - Analyst

* Matthew J. McClintock

Barclays Bank PLC, Research Division - Senior Analyst

* Michael Allen Baker

Deutsche Bank AG, Research Division - Research Analyst

* Simeon Ari Gutman

Morgan Stanley, Research Division - Executive Director

* Tami Zakaria

JP Morgan Chase & Co, Research Division - Analyst

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Presentation

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Operator [1]

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Good morning. My name is Jacqueline, and I will be your conference operator today. I would like to welcome everyone to the Party City's Fourth Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the call over to Mr. Ian Heller, Associate General Counsel of Party City. Thank you, Mr. Heller. You may now begin.

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Ian Heller, Party City Holdco Inc. - VP & Associate General Counsel [2]

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Thank you, operator. Good morning, everyone, and thanks for joining us.

This morning, we released our fourth quarter and full year 2018 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 Jim Harrison, our Chief Executive Officer; and Dan Sullivan, our Chief Financial Officer. We'll open the call with some prepared remarks by Jim and Dan before we open it up for Q&A.

Please note that in today's discussion, management may make forward-looking statements as defined under the Private Securities Litigation Reform Act of 1955 regarding the beliefs and expectations about the company's future performance, future business prospects or future events or plans. These statements are subject to risks and uncertainties that could cause actual results to differ materially from these statements. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we can give no assurance that such expectations will be realized. We expressly disclaim any duty to provide updates to our forward-looking statements, whether as a result of new information, future events or otherwise. We wish everyone to review the safe harbor statements provided in our earnings release as well as the risk factors contained in our SEC filings.

During today's call, we will refer to both GAAP and non-GAAP financial measures of the company's operating and financial results. For 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 Jim Harrison.

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James M. Harrison, Party City Holdco Inc. - CEO & Director [3]

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Thank you, Ian. Good morning, everyone, and thank you for joining us today. I'll begin by providing an overview of the company's performance for the fourth quarter and fiscal 2018. We will then discuss the progress made across various businesses. Dan will then discuss the financial and operational results in greater detail, as well as our outlook for 2019. After which, we will open up the call for your questions.

As you saw from this morning's earnings press release, top line results for the fourth quarter were slightly below the expectations, in large part due to continued helium supply pressures that unexpectedly persisted from November and, to a lesser degree, into December.

Gross margins were in line with expectations, and EBITDA and EPS were at the low end of our expected ranges as we exercised disciplined cost control.

For the full year, consolidated revenues grew 2.4%. Gross margins declined 20 bps, with EBITDA and EPS totaling $400 million and $1.61, respectively. We generated strong cash flow of $315 million for the year, which allowed us to complete significant franchisee acquisitions while also investing in the businesses and opportunistically repurchasing shares.

Looking back at 2018, it was an important foundational year for the business in which we made meaningful progress against several growth strategies that will strengthen the businesses in 2019 and beyond.

Starting with the retail business. Sales grew 4.3% for the year, reflecting the further execution of our omnichannel strategy. We continued focusing on improved consumer shopping experiences across both brick-and-mortar as well as online. This focus included completing Phase 1 of the retail productivity initiatives within the Party City stores, thereby improving the operational performance of the stores, simplifying store operating procedures, improving the flow of product and optimizing labor. The savings associated with these initiatives have served as a catalyst for reinvestment into the Party Planner program at store level, enhancing our level of customer service and customer experience.

At the end of the year, the Party Planner program was in 150 stores, and the positive results clearly demonstrate the opportunity for us to grow the basket to create a customer engagement and higher quality of service.

In 2018, we also strengthened our seasonal product offerings with a wide variety of refreshed assortments.

At Halloween City, we supported a better-curated core assortment for the temporary store consumer, with the larger offering of animatronics, thereby creating greater in-store theater. Additionally, we expanded the assortment in certain stores to include a selected toy offering. These changes helped drive meaningful comp sales in our temporary stores.

Touching, for a moment, on the toy pilot. The results were mixed. The performance of the 50 Toy City temporary stores did not meet our early on expectations. However, we are very encouraged by the results seen in the permanent stores, where we piloted a number of tests for the toy category, including expanded in-aisle presence and front-end in-and-out programs. While we are still evaluating the full opportunity for this category, there's a little doubt that toys can play a role in strengthening our overall offering.

We also made meaningful improvements to our e-commerce business in fiscal 2018. We completed and launched the broader site replatforming, that included improved products, creative and site content. This replatforming has resulted in better usability, easier checkout flow, and a more facile browsing experience for consumers, especially when using their mobile devices. We also leveraged this technology to support the consumers' desire to seamlessly shop the category through the expansion of our buy online and pick up in-store program as well as improved product availability checks online. In October, we announced the expansion of our digital initiatives with the creation of a Party City branded storefront on Amazon marketplace. This move has allowed us to further expand the reach of our brands and unique product offerings while complementing the partycity.com website.

Within the Amazon storefront, we initially focused on a curated offering for Halloween and then broadened the assortment to include Christmas and New Year's products. And recently, we have broadened the offering to include a selected everyday product offering as well. Largely, this offering is in the form of coordinated kits, as we leverage our position as the leading manufacturer, supplier and retailer of consumer party goods.

These e-commerce improvements have been well received by consumers, reflected by improved traffic to our sites, increased conversion rates and accelerated growth rates. When including the impact of BOPIS, e-commerce comps for the fourth quarter and full year were 33% and 18%, respectively.

Turning for a moment to the consumer products businesses. While the helium shortages and supply chain disruptions in the second half of 2018 affected our consolidated top line performance, the total consumer products business on a pro forma basis increased about 1%.

The North American consumer products business gained significant new customers in both the grocery and mass channels, which helped partially offset continuous sluggish franchise and independent party specialty retail performance. The North American consumer products business was also successful in continuing to increase distribution into nontraditional party channels or alternative channels, including movie theaters, zoos, sporting and entertainment venues. The results we've seen from increased focus on leveraging of our personalized products capabilities, as well as newer channels, has been very encouraging.

Internationally, the consumer products businesses has deepened a relationship with key retailers in Australia, Europe, the U.K. and Mexico. Education and curation of those SKU assortments are creating inroads in many new markets. We continue to see an opportunity for us to increase our overall global presence.

The Kazzam marketplace pilot remains as part of our broader future digital strategy. In the fourth quarter, we achieved the goal of going live in about 15 markets at the end of the year. Our belief is that the broad proof of concept has been met, and we are aggressively moving to the second stage of this pilot, focused on customer acquisition.

Plans for 2019 include utilizing the full suite of Party City assets to build awareness, drive traffic, and exploit the intersection of our marketplace and retail businesses.

We are now deploying about 15% of our stores a combination of in-store initiatives, as well as digital efforts in limited above-the-line marketing to drive consumer awareness and help scale the business.

Based upon the results, we anticipate further market rollout later this year. And I look forward to sharing the results as Kazzam comes to life and becomes a reality.

In addition to Kazzam, in 2018, we invested heavily to improve and expand our CRM capabilities. These efforts have and will continue to allow us to gain a deeper understanding of our consumer and create more targeted marketing campaigns, delivering a more personalized experience for our consumers. We ended 2018 with a customer database of over 25 million identifiable customers, representing 4 years of purchase data. It is this growing database that we will leverage to create more personalized experiences for our customers.

We continue to optimize the effectiveness and the mix of our marketing spend. Working dollars increased 3% year-over-year, despite spending remaining essentially flat. These efforts include diversifying away from traditional media venues and increasing our digital spend and promotional advertising, which increased 25% year-over-year in 2018.

With unaided brand awareness over 70%, the marketing dollars we deploy must be done so in conjunction with our enhanced CRM targeting capabilities and really focus on driving uniqueness for the customer.

Like all retailers, we have been faced with heightened inflationary pressures in 2018. However, our bottom line results for the year demonstrated the clear benefits of our differentiated vertical model. The self-manufactured Share of Shelf expanded by 30 points in 2018 and productivity improvement initiatives helped partially mitigate these inflationary pressures, limiting gross margin decline to 20 bps for the year. Dan will discuss this in more detail shortly.

The vertical model also provided the business an opportunity to mitigate the potential impact of the tariff policy on the business. If the 25% tariffs were to go into effect at some future point in time, we have largely addressed and essentially mitigated the potential $12 million annual run rate headwind. This has been accomplished, in large part, through a combination of product reengineering, accelerated resourcing efforts and increasing the self-manufactured share, generally in our factories in North America. I am extremely proud of how our consumer-products teams have moved quickly and effectively to leverage our best-in-class capabilities to meet this significant operational challenge.

Timely and highly accretive retail acquisitions were a core component of our growth strategy in 2018. And we completed the acquisition of 58 franchise and independent stores across Maryland, Pennsylvania, Minnesota, North Dakota and Texas in 2018. As we said before, these acquisitions further expand our corporate footprint at very attractive cash-on-cash multiples, and 2018 provided a unique moment for us to accelerate these acquisition efforts. Going forward, we expect the pace of retail store acquisitions to significantly decrease. And we will prioritize debt paydown, as we focus on our leverage ratio goal of between 3 and 3.5x by the end of 2020.

So in summary, 2018 top line results were slightly below expectations due in part to the temporary headwinds. But through controlled costs and deleveraging our vertical, we delivered bottom line results at the low end of our guided range. We made meaningful progress on our strategic initiatives to strengthen the business. And we're well-positioned in 2019 as the calendar turns favorable, with Halloween moving to a Thursday and with what we believe to be a very strong license portfolio in the year ahead.

The 2019 strategic objectives for the businesses are clear: one, drive meaningful organic growth; two, expand the vertical as we produce, source and distribute more efficiently and improve the overall operational performance of the business. And finally, most importantly, strengthen the balance sheet for long-term success of the business.

Critical investments in support of our top line objectives have been made, and the business is poised for sustainable comp sales growth. Process adjustments have been instituted to improve operational efficiencies and the capital investments in manufacturing distribution made in 2018 are set to yield the anticipated benefits.

But once again, rest assured, we remain firmly committed to accelerating our pay down debt all of which supports our focus on creating long-lasting shareholder value.

Before I close, I'd like to acknowledge the announcement made today that Dan Sullivan has decided to pursue another opportunity elsewhere and will be leaving the company on March 22. I want to thank Dan for his commitment and dedication to PCHI over the past 2.5 years. He has built a strong and capable finance organization and helped drive our retail productivity initiatives. We wish Dan all the best in his future endeavors. As a result of Dan's departure, we have also announced that Michael Correale, our Chief Accounting Officer, who served as our CFO for 14 years, from 2002 to 2016, has accepted the position of interim CFO, allowing for a seamless transition until a permanent replacement for Dan is identified. Mike's knowledge of the business and experience will provide a steady set of hands.

And now I'd like to turn the call over to Dan to discuss the fourth quarter and full year results and the 2019 outlook in greater detail.

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Daniel J. Sullivan, Party City Holdco Inc. - CFO [4]

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Thanks, Jim. It's been a wonderful 2.5 years at Party City, and I'm privileged to have served the company and our shareholders. I am extremely proud of the tremendously talented finance organization that has been built, and I'm confident that the organization is well positioned for continued success.

Now turning to the results.

As you heard Jim mention, 2018 was an important foundational year as we made critical investments across the business to enhance our positioning as a world-class vertically integrated retailer. There were a few unexpected transitory issues, which we've discussed and which I'll elaborate on in a moment, that transpired in the back half of the year that negatively impacted the top line and pressured gross margins at both retail and wholesale. That said, even with these operational headwinds, we still reported EPS and EBITDA within our updated guided range for the year.

For fiscal 2018, revenues increased 2.2% on a constant currency basis. Gross margin rate declined 20 basis points, as expected. Adjusted EBITDA declined 2% and adjusted EPS increased to $1.61 from $1.24, inclusive of share repurchases and the benefit from tax reform, as well as the headwind associated with higher interest expense. And we once again generated strong free cash flow of $315 million.

Our fourth quarter top line results were impacted by persisting helium pressures that, at times, were a significant headwind for both our balloon business and juvenile birthday business, negatively impacting both our retail comps as well as our consumer products sales. Despite sluggish revenues in the quarter, in part also impacted by the New Year's Eve shift, the year-over-year decline in gross margin was in line with expectations and EPS came in towards the middle of the range, driven by solid cost control.

Looking more closely at fourth quarter results.

Consolidated revenue grew 2% on a reported basis or 2.5% when adjusted for currency. In our retail segment, sales increased 4.5% in constant currency, largely a result of the acquisition of franchise and independent stores over the last 12 months, as we added about 8% in retail square footage in 2018, almost entirely through acquisitions. At quarter's end, our store network totaled 962 stores, 866 of which were corporate stores.

Our brand comparable sales, which include our U.S. and Canadian permanent stores and North American e-commerce business, declined 2.9%. This reflects an approximate 150-basis-point impact from the helium shortage that persisted from Q3. In addition, as we expected, the headwind of the New Year's Eve shift was about 110 basis points, implying an underlying comp for the quarter, absence of these 2 factors are down slightly.

Underlying comp sales performance strengthened as the quarter progressed, and seasonal comps in December were positive despite the New Year's Eve shift, with the Christmas season up over 20%, as customers responded well to our new Christmas and Hanukkah designs and updated assortments. Our web business remained a bright spot in the quarter, increasing 12% in Q4 or 33% when adjusted for BOPIS.

Turning to the non-vertical consumer-products businesses.

Net revenue increased 30 basis points in Q4 after adjusting for the impact of franchise and independent acquisitions and foreign exchange, as we cycled last year's 4Q constant currency organic growth of 12%.

International consumer products declined approximately 1.8% in constant currency, despite mid-single-digit growth in our core commercial markets. This decline was partially due to continued sluggish results in our direct-from-plant FOB business, combined with the tough comparison to prior year period when we saw 20% international growth. Importantly, we continued to strengthen relationships with key retail partners in our core international markets and have leveraged our strong positioning in the foil balloon category, which drove continued growth in Australia, Europe and Mexico. On a 2-year basis, we have seen quarterly growth of about 18%.

The domestic consumer products business continues to be challenged due to soft franchise and independent performance and declined 1.1% adjusted for acquisitions, as we cycled 10% growth from last year in Q4. The declines were largely a result of the American Greetings' decision to exit the category, a sluggish Wednesday Halloween and declines in the gift business. Importantly, the alternative markets channel increased about 5% on a run rate basis in the quarter and reflects key wins in mass and grocery, most notably with Target, Michaels and Kroger's.

As expected, our consolidated gross profit margin was 45.3% or 160 basis points below the same quarter last year and in line with our expectations. Almost 100 basis points of the decline was attributable to the operational headwinds that we previously discussed on our Q3 call. This was related to supply chain disruptions associated with the surge in demand for moving product out of China ahead of tariff implementation, resulting in incrementally freight, distribution and labor costs that were largely realized in Q4. Additionally, we continued to experience increased inflationary pressures associated with freight and distribution costs and saw some negative impact as a result of higher helium costs, in terms of both sourcing and negative product mix.

Finally, as we previewed in our 3Q call, we shifted promotional spend from the third quarter to the fourth quarter in support of our holiday execution. All of these headwinds were partially mitigated by the continued execution of our retail productivity initiatives. Overall Share of Shelf decreased 160 basis points, primarily due to the negative impact on Halloween from Q3's operational issues getting product out of China. Manufacturing Share of Shelf also decreased 160 basis points to 16.6%, also driven largely by the negative helium shortage impact on balloon sales. Normalizing for the helium issue, the operational challenges already discussed and the New Year's Eve shift, manufacturing Share of Shelf was just over 18% and flat to last year's Q4.

Operating expenses as a percent of revenue leveraged 20 basis points year-over-year, largely reflecting the continued labor productivity efforts at retail and a reduction in management incentive costs. In our retail business, we saw labor rates improved by 40 basis points, fueled by 70 basis points of benefit from the scaling of our productivity initiatives. And we've already begun piloting the next phase of our work for 2019. We are redeploying the savings from our productivity initiatives into the Party Planner program, which we now have in about 150 stores, with about 70 stores having been launched late in 3Q.

Overall, we're continuing to see about a 1% to 2% comp lift versus the rest of chain, with stronger results in the more mature stores. We continue to improve this program by strengthening the labor model, enhancing our training program, reducing associate turnover and continuing to modify the underlying incentive schemes to drive performance.

We are seeing the benefits of these improvements in our customer satisfaction and net promoter scores, which continue to strengthen. With the holidays now behind us, we'll further evaluate and scale the program over the course of 2019.

Reported income from operations was $158.8 million or 19.7% of net revenue compared to $167.4 million or 21.2% of net revenue in the prior-year period, with the decrease due to lower gross margins.

Interest expense for the fourth quarter was $29.2 million or $7 million above the same quarter last year, with the increase equally attributable to increased borrowings under our ABL facility, the impact of increasing LIBOR rates on both our term loan and ABL facility, and the high yield offering that was successfully executed in August.

In the quarter, our reported effective tax rate was impacted by nonrecurring adjustment related to tax reform. Our adjusted effective tax rate was 25.4%.

Adjusted net income of $103.4 million increased 9.9% compared to the last year's fourth quarter, and adjusted EPS increased to $1.08 per share from $0.81 per share. The 2018 results are inclusive of tailwinds from tax reform and a reduction in our share count due to our share buyback activity, partially offset by higher interest expense year-over-year. Adjusted EBITDA decreased about 4% versus the fourth quarter of last year, to $188.9 million.

Turning to our full year results.

Consolidated revenue was $2.43 billion, which represented growth of over 2% on both a reported and constant currency basis. Retail operations posted a 4.3% increase on both a reported basis and in constant currency, driven largely by increased store count. During the year, we acquired 58 franchise and independent stores and opened 5 net new stores. Reported comps declined 70 basis points for the year, while on an adjusted basis, excluding the unique headwinds of helium shortages, the operational issues, getting product out of China, as well as the tailwinds of lapping hurricanes and the SEO issues of a year ago, underlying comps were essentially flat.

Our e-commerce comp sales increased 18% when including BOPIS sales. Our nonvertical consumer-products revenue increased 0.3% after adjusting for the impact of franchise acquisitions and foreign exchange, largely reflective of American Greetings' decision to exit the category and the continued deterioration of the independent and franchised business in part, a reflection of a Wednesday Halloween. The alternative markets business grew 9% on a run-rate basis for the year, and we are encouraged by the growth seen not only in mass and grocery but also in the promotional and experiential channels, which we will continue to focus on in 2019. Our international consumer products business grew 1.7% for the year on a constant currency basis, driven by almost 9% constant currency growth in our core markets of Australia, Europe, the U.K., Canada and Mexico.

We continued to exploit our full product assortment, with growth being driven by innovative merchandising, product development and category management with key retailers.

Gross margin rate declined 20 basis points for the year, despite continued productivity gains at retail. The margin declines were primarily due to increased freight and logistics costs and higher costs from the Q3 operational issues related to getting product out of China. Negative product mix and commodity and labor inflationary pressures were additional, though less meaningful, headwinds.

We increased the manufactured Share of Shelf 30 basis points to 22.9% and estimate this increase to be 100 basis points year-over-year when adjusting for the negative effects of the items discussed earlier.

Operating expenses were $713.9 million, which were higher by about $17.7 million or flat as a percentage of revenue versus 2017, primarily due to the improved labor productivity management, better expense management and lower incentive costs.

At retail, we realized a 60-basis-point improvement in direct labor rates, largely as a result of the maturation of our first phase of labor productivity initiatives.

Interest expense was $105.7 million compared to $87.4 million last year, with the increase attributable to the increased borrowings under the ABL, the impact of increasing LIBOR rates on both our term and ABL, and to a lesser degree, the recent high yield offering that was successfully executed in August.

Our reported effective tax rate reflects a nonrecurring adjustment related to tax reform. And for the full year, this rate was 25%. Adjusted net income was $156.8 million or 5.5% above last year, resulting in adjusted EPS growth to $1.61 per share versus $1.24 per share in the prior year period. The 2018 results are inclusive of tailwinds from tax reform, a reduction in our share count due to our buyback activity, and partially offset by higher interest expense and Kazzam investments year-over-year. Adjusted EBITDA for the year was $400.1 million versus $409.2 million in the prior year.

Finally, for the year, we delivered free cash flow, defined as adjusted EBITDA less CapEx, of $314 million, a decrease of $28 million or 8% versus 2017, primarily due to increased CapEx of $19 million in support of our web replatforming and productivity efforts at retail and in our main distribution center. Cash flows from operations was a source of $102 million, including a working capital use of $125 million, which was largely a reflection of increased inventory levels, in part due to softer than expected Halloween sales. CapEx totaled $86 million, while we allocated $40 million towards stock repurchases and $65 million towards acquisitions. We ended the year with net debt of about $1.9 billion, resulting in a debt leverage ratio of 4.7x, with about 0.10 turns as a result of our share repurchase program. At the end of the quarter, we had approximately $210 million available in our existing asset base revolver.

Before I discuss our 2019 guidance, I wanted to note a few items impacting our outlook. As Jim said, there are a few tailwinds in 2019, including the shift to a Thursday Halloween and a more favorable licensed property calendar, which is most relevant for our juvenile party and costume businesses. Our comps guidance for the year contemplates further helium supply constraints, anticipated to be at current levels and which are likely to disproportionately impact half 1 due to business seasonality and the fact that we will cycle 2018 supply issues, which began in August of last year.

Further, our quarterly comps outlook reflects calendar favorability in Q1 due to the New Year's Eve shift and is partially offset by the negative impact of Easter shifting into Q2. Overall, we expect half 1 comps to be flat to slightly negative.

We expect to benefit from supply chain investments, we made ahead of and following the disruptions that impacted the business in 2018. While inflationary pressures are expected to persist, most notably related to freight and helium, we anticipate GAAP operating income margin to be slightly positive when compared to 2018 rates, largely reflective of slightly positive gross margin rates. We expect interest expense to be in the range of $115 million to $120 million for the year.

With that said, for fiscal 2019, we expect revenue to be in a range of $2.488 billion to $2.538 billion and comp sales to be up about 1%. We project for the year adjusted net income to be in the range of $152 million to $162 million or $1.61 to $1.72 per share. We expect adjusted EBITDA to be in the range of $405 million to $418 million.

In terms of capital allocation priorities, we expect to spend about 2.8% of net revenue on CapEx, which is down from approximately 3.5% in 2018. And we anticipate ending the year with a net debt leverage ratio of 4.1x.

For all other detail around our outlook, please refer to our press release.

And with that, I'd like to turn the call back over to the operator to open up the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Matt McClintock from Barclays.

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Matthew J. McClintock, Barclays Bank PLC, Research Division - Senior Analyst [2]

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And best of luck, Dan.

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Daniel J. Sullivan, Party City Holdco Inc. - CFO [3]

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Thanks, Matt.

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Matthew J. McClintock, Barclays Bank PLC, Research Division - Senior Analyst [4]

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Just 2 questions. The first one is just helium. Could you just give us your broader perspective on the helium shortage? There's been a lot of news over the course of last month that the helium shortage is getting -- intensifying. And can you just talk about how your sources of helium are, I guess, locked in, or provide you with some type of view that you will be able to get that product?

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James M. Harrison, Party City Holdco Inc. - CEO & Director [5]

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Sure, Matt. So I think, as you recall in our third quarter call, we called out helium, and it was our expectation and it was the expectation of those who are "experts" that the situation would stabilize and begin to resolve itself. Obviously, it continues to persist. And as Dan mentioned, in our comps, we've projected a continuance of the helium situation at its current levels as we look at the full year. From a percentage standpoint, currently, we're operating at about a 60% to 70% of our average allocation for helium, and that bounces around quite a bit based upon the time of the month and general availabilities. We've done a number of things to source helium from additional resources outside of our standard contract relationship. And as a result of that, we've been able to bring the average up to about 70%. As we look at typically what we need to really satisfy our demand vis-a-vis our allocation of our contract, we need about 80% to 85%. So there's about a [14%] give or take true headwind in the availability to us of helium on a day in and day out basis. But like I said, over the course of a month or a week, it can vary from anywhere from 50 stores having helium issues to over 200 stores having helium issues. As we look for the longer term, as I -- those of you know and have heard me talk about helium in the past, there's plenty of helium in terms of known reserves. The constraint really today is really supply chain and refining capacity. It's very well documented in a number of articles where that refining capacity is being built, and because it's for the shortage of the refining capacity being, primarily, the influence of the government's decision to continue to release helium out of the BLM years ago in quantities that inhibited investment in refining capacity. So as we look at the full year, we expect helium to be a headwind. We believe our comps guidance incorporates in it enough of a quantification of that headwind that we still conservatively believe that we can be in the range of flat to a slight 1% comp. Hopefully, that's helpful.

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Matthew J. McClintock, Barclays Bank PLC, Research Division - Senior Analyst [6]

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Extremely helpful, Jim. And just, I guess, as a clarification question on the comp guidance, one, for the full year, I believe that's similar to your comp guidance as you entered last year or 2018. And so, I guess, my question is, does the helium headwind offset the benefit of a more optimal timing of Halloween, and that's why you have a similar comp benefit as you began last year?

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James M. Harrison, Party City Holdco Inc. - CEO & Director [7]

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I think fundamentally, that's probably a very down-and-dirty, quick analysis of the situation. Obviously, there's a great number of puts and takes within our guidance, and within our helium -- and within our projected, pardon me, comp for the year. Obviously, the operational issues that we highlighted in our third quarter call, we've taken tremendous strides and steps to make sure that we are ahead of that curve, and we don't anticipate that sort of drag on comps in 2019. And there are -- like I said, there are a number of puts and takes, but an easiest way of thinking about it is, yes, we moved to a strong calendar on Halloween, we moved to strong properties, and the helium mitigates the full impact of what that normalization normally would have provided us.

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Operator [8]

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Your next question comes from Simeon Gutman from Morgan Stanley.

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Simeon Ari Gutman, Morgan Stanley, Research Division - Executive Director [9]

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My question is on EBITDA guidance for the growth that's embedded in the guidance year-over-year. So we know you're lapping investment from 2018. You mentioned some nonrecurring consultant costs. I don't know if you quantified some operational headwind. And now -- and we know helium, even though it sounds like it will linger a little bit in the first half. And then, Jim, you just mentioned the better license product. And I would guess Halloween should be no worse than a push relative to this year. So it looks likely the EBITDA growth that's implied, it's either muted for conservatism, or there's just a lot of cost that's still holding on in the business.

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Daniel J. Sullivan, Party City Holdco Inc. - CFO [10]

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Yes, Simeon, it's Dan. I would maybe highlight 2 things. One is our outlook on gross margin, and we should not ignore the helium impact on gross margin. What we've said is we expect gross margins to be flat to slightly positive versus a year ago. Helium will represent about a 30-basis-point headwind to margins in the year, equally sort of balanced between higher costs to secure helium and the negative effect on mix that selling less balloons have. So you have to start with our gross margin outlook. I think the other piece that I would call out is the TI impact year-over-year. We continue to have less and less TI add-backs to our EBITDA, which we are cycling about $5 million less in add-backs in 2019 than we were in 2018, which makes the flow through of EBITDA look a little bit skewed but doesn't actually change sort of how we think about the year.

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Simeon Ari Gutman, Morgan Stanley, Research Division - Executive Director [11]

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Okay. And then just related to balloons and helium, can you tell us when you -- if you make -- when you make money on a balloon, are you making money marking up the balloon and the helium? Or is it just one side of it? And have you considered raising prices on balloons?

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James M. Harrison, Party City Holdco Inc. - CEO & Director [12]

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To answer that question, the answer to the question is, not only have we considered it, we've actually done it to mitigate some of the headwinds on the helium. We don't really mark up the helium per se. Helium is a part. It's similar to the labor to fill the balloon and make the -- put the ribbon on the balloon. That's all incorporated within the cost of executing the sale of an inflated balloon. But we have looked at pricing on our balloons to adjust for the increased cost of the helium, but with increased prices, obviously, there's a put and a take that occurs at retail in terms of consumers perceptions to how many balloons they're going to buy. And just following up on your earlier question a little bit about the calendar shift and the impact of the store licensing, it's interesting to note that, as we mentioned in our third quarter call, the portion of our business that we saw really most affected by this most recent Halloween was not necessarily the adult business which you would generally expect to be substantially affected by the midweek Halloween, but actually the girls business due to the absence of strong properties. So as we think about this shift to Thursday and the impact of that, really, that coupled with the girls shift is really what's going to drive the Halloween business as opposed to what we don't really expect it to be, a larger portion of the assortment being purchased by the adult category. So while there's 2 benefits there, they basically merge to one.

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Operator [13]

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Your next question comes from Mike Baker from Deutsche Bank.

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Michael Allen Baker, Deutsche Bank AG, Research Division - Research Analyst [14]

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Just to touch on these issues again. And I guess, throughout the year, you've given us an update or at least some data we could probably try to back into it, but I'll just ask your view on, can you order all the issues that happened in 2018? Which impacted you the most, in terms of Halloween, the helium, poor licensing, the tariff China issue, even the freight costs? I mean, there were like 5 or 6 things. What was the most impactful in your mind?

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Daniel J. Sullivan, Party City Holdco Inc. - CFO [15]

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Yes, Mike, so it's Dan. I think you have to separate it between, are you talking top line impact or gross margin impact, right? Certainly, from a top line standpoint, comps, in particular, we would obviously say the issue is getting product out of China and, therefore, affecting our Halloween business would be first and foremost on the list. And then secondarily, helium, while it had an impact in Q4, which we've estimated to be 150 basis points of comps headwinds, on a full year basis, obviously, far less than that. If you talk about gross margins and full-year rate, the freight and distribution costs would be first on the list because that's a structural issue that has been with us for the entire year and drove about 35 to 40 basis points of headwind against margins. Again, from a timing point of view, the issues getting product out of China was limited to the fourth quarter. It had a meaningful impact on the quarter. We've said about 100 basis points year-over-year, but far less on a full year. So hopefully, that answers your question.

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Michael Allen Baker, Deutsche Bank AG, Research Division - Research Analyst [16]

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Yes, it does. And then following up, the freight and distro costs of 35 to 40, is that including the China issue, or is that separate, just higher freight rates and the like?

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Daniel J. Sullivan, Party City Holdco Inc. - CFO [17]

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No, it's a separate.

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James M. Harrison, Party City Holdco Inc. - CEO & Director [18]

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It's a just...

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Michael Allen Baker, Deutsche Bank AG, Research Division - Research Analyst [19]

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Understood. And do we expect that to dissipate at all in 2019? Some spot rate and contact rates have already come down a little bit. Or are you planning for that same type of tailwind in -- or headwind, I should say, in 2019?

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James M. Harrison, Party City Holdco Inc. - CEO & Director [20]

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We're anticipating it'd be a continuing headwind to the magnitude that it was this past year. We are not expecting any real loosening on freight at any time soon. There have been a number of bankruptcies of freight carriers recently in this quarter, even. So we don't anticipate freight loosening up substantially.

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Michael Allen Baker, Deutsche Bank AG, Research Division - Research Analyst [21]

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Okay, understood. If I could ask one more, maybe more of a positive question did the Party Planner initiative -- it seems like it's going pretty well. It's in 150 stores. You've sort of been liking to talk about the pace of the rollout, but any color on how many more stores we expect to see that in, in 2019? Eventually, this -- can this be in all stores? And is there enough efficiencies to offset those costs, still to go?

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James M. Harrison, Party City Holdco Inc. - CEO & Director [22]

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Sure, I'll start and I'll ask Ryan Vero, President of Party City Retail Group, to chime in. Essentially, in terms of rolling it out to all stores, that would not make sense. What we are doing is, we're looking at ways of utilizing technology at various levels at store level and also broadening the training of our associates so that we don't have a bifurcated group who's simply focused on customer engagement. Really, our goal, and Ryan can certainly enhance this conversation, is to truly create a service orientation throughout our retail organization so that we are less dependent on a single Party Planner to be the face of the customer engagement initiative, but rather broaden the customer engagement initiative across the full spectrum of associates. Ryan, I'll ask you to...

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Ryan T. Vero, Party City Holdco Inc. - President of Retail [23]

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Yes, sure. Mike, a couple of comments, I guess, we've been testing this program now for nearly a year and we've expanded it to the 150 stores. We're continuing to refine that model. We are seeing some very positive elements of it, particularly the customer feedback and the results of average transactions when we're more engaging with these customers. But it is a continued refinement, finding the right model, the right operating hours -- or the right hours for those associates to be in the stores and on the right days. And as we get those things honed in, we'll be expanding it to a broader base of stores, and also developing, as Jim mentioned, into an element of our selling culture that we're trying to essentially inculcate into the entire organization. So we're seeing some positive results there as well.

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Operator [24]

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Your next question comes from Tami Zakaria from JPMorgan.

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Tami Zakaria, JP Morgan Chase & Co, Research Division - Analyst [25]

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I have a question regarding your inventory position which has been growing for 2 quarters in a row now. And your days inventory outstanding has jumped quite a bit in 2018 versus 2017. So do you expect that to come down as we look into 2019?

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James M. Harrison, Party City Holdco Inc. - CEO & Director [26]

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The answer to that question, Tami, is, yes. The growth in inventory has really been driven -- on a consolidated basis, it's been driven by a number of things, right? As Dan mentioned, we acquired approximately 50 franchisee and independent stores. That by itself is an addition of more than $25 million of inventory for those acquisitions. We also had heavier carryover on Halloween than we had in 2017 going to 2018. The irony there is, the strong sell-through and lower buy in 2017 actually put us in a position where when we ran into those operational issues in 2018, we didn't have the carryover stock to really make a significant statement for Halloween in advance of the normal selling season. And so obviously, there's a good news, bad news with the stronger -- with the larger carryover Halloween this year that we'll be able to make a stronger statement earlier in the season, at the beginning of September. But fundamentally, as an organization, as I said in my earlier comments, we're committed to driving our leverage down. That means doing a lot of things, including sharpening our pencils and taking a tougher look and a harder look at our working capital utilization, not just at retail but throughout our entire business. We've got 28 operating businesses, 3 of which are retail and 25 of which are on the consumer-products side. And each one of those businesses has a General Manager and he's a steward of assets and his job as a steward of assets is to sweat and maximize the return on those assets, not just the working capital, but also fixed assets. And that's really a huge focus for us this year. And as Dan said, our guide is to take the leverage down to just above 4x, and that's barring any other potential activities which could generate onetime cash for us.

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Tami Zakaria, JP Morgan Chase & Co, Research Division - Analyst [27]

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Got it. And I do have a very quick follow-up question, which is, have you been seeing any impacts from the delay in tax refunds? Is that -- did that impact your performance in January or February so far?

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James M. Harrison, Party City Holdco Inc. - CEO & Director [28]

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No.

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Operator [29]

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Your next question comes from Joe Feldman from Telsey Advisory Group.

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Joseph Isaac Feldman, Telsey Advisory Group LLC - Analyst [30]

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One question kind of about the outlook for 2019. How should we think about interest expense going forward? Because it did come out a little bit above, I think, what some of us were thinking for the fourth quarter and, I know, obviously, the impacts you described with floating rates and things like that. How should we look at it for next year? I'll start...

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Daniel J. Sullivan, Party City Holdco Inc. - CFO [31]

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Yes, so Joe, we've guided at $115 million to $120 million. Recall for 2018, we guided at $105 million. We came in actually just under that -- just over that, about $106 million. So we feel like we've been pretty transparent with the figures. Obviously, the high-yield offering of August and the slightly higher debt levels coming into '19 will both increase the drive -- increase the interest expense for us. And our guide reflects that if you essentially use the guide we put forward on EPS, there's about a $0.07 to $0.10 headwind in EPS associated with the higher interest expense.

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James M. Harrison, Party City Holdco Inc. - CEO & Director [32]

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And then remember, Joe, we chose to swap some term out for the high yield at a much higher rate. We felt creating some certainty around interest expense and particularly our cost of -- or, our rate of interest going forward was a prudent decision as opposed to being subject to perhaps the volatilities that might occur with the floating rate that was in our term debt. But once again, as we continue to pay debt down, we'll see that interest expense number come down and the fact that we now have fixed rate debt will make it a lot easier for -- and much more transparent for everybody here as well as those on the call to be able to gain a perspective and an outlook with respect to where interest is or where it's headed.

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Joseph Isaac Feldman, Telsey Advisory Group LLC - Analyst [33]

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That's helpful. And then I wanted to go back to -- I know you guys did a lot of operating improvement within the store the past year to just enhance the overall experience and the new operating procedures and all that -- those things you talked about earlier in the call. What -- and you referred to it as Phase 1. What -- how should we think about Phase 2? Like what is kind of Phase 2? And is that a 2019 event or is it a longer term?

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Daniel J. Sullivan, Party City Holdco Inc. - CFO [34]

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Yes. So I would think a couple of things, Joe, for how we think about Phase 2. One is, this is not a retail-only mindset or approach. Productivity improvements and efficiency improvements are core to the DNA of the business. So we have programs in place here in the headquarters. We have programs in place in our manufacturing facilities. I think retail was just out ahead of it and did a very good job developing the program for 2018, which also provides some carryover benefit in '19. So I would start by saying that it is a way of how we think about running the business and really driving productivity across the enterprise. In terms of 2019 sort of specific efforts, maybe, Ryan, I'll ask you to just touch on some of the things that the team is working out at retail.

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Ryan T. Vero, Party City Holdco Inc. - President of Retail [35]

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Yes. So, as Dan mentioned, we do have some carryover from the prior year. But as with any new payroll model that you implement in a store or new operating procedures, there's continued enhancements that go on. And so we have realigned our payroll model throughout last year and actually going into 2019 as well to better align with front-facing consumer demand, allocating more hours to that activity to help on the selling culture side that I'd referred to prior, as well as continued refinement of the operating back office procedures, receiving and put away, planogram transitions, et cetera, that are sort of the boring parts of operating retail stores to many, but very, very important in terms of our operating excellence in the stores.

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James M. Harrison, Party City Holdco Inc. - CEO & Director [36]

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And, Joe, this is Jim. I'll just add that on the consumer products side of the business, we've made a number of investments in 2018 which both Dan and I referred to in our comments. We will harvest some of the benefits of that this year as we continue to work through those investments and finalize the implementation of those investments. Most notably in our distribution center, we recently put in a new -- another pick module which we refer to as order-stock retrievable system, which enhances the efficiency of our picking in our warehouse on slow-moving items or lower-turning items and smaller items by a factor of almost threefold, which is in response to, obviously, higher labor rates, as well as the continued growth of our business.

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Operator [37]

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Your next question comes from Curtis Nagle from Bank of America Merrill Lynch.

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Curtis Smyser Nagle, BofA Merrill Lynch, Research Division - VP [38]

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So yes, I guess I'll just the first question would be, what are you guys targeting for manufacturing Share of Shelf this year? And do you think you're still on track to double over the next 4 or 5 years or so?

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Daniel J. Sullivan, Party City Holdco Inc. - CFO [39]

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Yes, we don't actually guide at that level, but I will say we do expect to continue to see meaningful growth in manufactured Share of Shelf. We didn't see it in the fourth quarter. I think I commented in my opening remarks about that, essentially, there was the headwinds of the product issues getting product out of China and the helium issues. But if you normalize for all of that, we saw manufactured Share of Shelf essentially flat in the fourth quarter and up about 30 basis points for the year. We think that the growth in 2019 and beyond will be meaningfully more than that as we continue to scale up our recent Granmark acquisition and increase the capacity of product coming out of that facility, as well as continue to see growth in our balloon category.

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Curtis Smyser Nagle, BofA Merrill Lynch, Research Division - VP [40]

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Got it. And yes, just, I guess, just going back to the helium issue. I mean, what gives you the confidence, you think this will all dissipate, I guess, by the middle of the year? And how much certainty do you have that capacity constraints will be resolved?

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Daniel J. Sullivan, Party City Holdco Inc. - CFO [41]

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Yes, I think it's important, as we contemplated the guide, we don't think this dissipates at the middle of the year, so I want to be clear about how we thought about the guide. We do think that there are structural constraints within supply that will last for the year. But having said that, the impact will be felt for us more in the first half of the year for a couple of reasons. One is just the seasonality of the business, New Year's Eve to Valentine's Day to Graduation. And secondarily, we will begin to cycle the supply constraints that we saw in 2018, in August. So our guide contemplates a full year of continued challenge within helium, much the way Jim described it, but it will be felt disproportionately in the first half of the year.

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Operator [42]

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Your next question is from William Reuter from Bank of America.

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Unidentified Analyst, [43]

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This is Mike on for Bill. So my first question is can you talk about the impact, if any, that you guys are expecting from the second film of Disney's Frozen and what it will have on the fiscal year or Halloween as you saw with girls?

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James M. Harrison, Party City Holdco Inc. - CEO & Director [44]

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Sure. So Frozen is a fourth quarter event. We're not allowed to sell products associated with the new movie Frozen 2 until October 4. So somewhere around the end of September, our stores -- the back rooms of our stores will be packed with lots of Frozen product from party product to costumes and decor. We anticipate it being a good strong property. We don't anticipate that it will be quite the phenomenon that it was back in 2014, '15, but we do expect to be a strong property. I believe the first snippet of a trailer had, Ryan, was it...

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Ryan T. Vero, Party City Holdco Inc. - President of Retail [45]

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116 million in a day.

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James M. Harrison, Party City Holdco Inc. - CEO & Director [46]

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116 million views in one day, so that kind of tells you that the market is ready for it. But in terms of being a meaningful event for us in Q4, as I said earlier, when we looked last year at Halloween, the costumes side of the business, it was really the juvenile girls side of the business that was really the weakest. And so to the extent that Frozen will be a strong property, we see it potentially filling that void, which fundamentally really has a customer that we're accustomed to having, making an alternative product selection with respect to the Frozen images. I look at Frozen really as having a bit of a tailwind in Q4, and hopefully a better tailwind as we go into 2020, as it continues to gain momentum, and we go to DVD and all the other forms of streaming media that help support a property for longer periods of time.

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Ryan T. Vero, Party City Holdco Inc. - President of Retail [47]

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And there's just one other thing worth noting, is the movie's official release date is in November, and so we'll be, obviously, marketing off the hype of the movie and the build-up to the launch of the movie. There is some limit to the product that you can sell prior to the actual movie launch as well, so we'll, obviously, have all of that product in the stores ready to go in early October for Halloween, but it will be in advance of the movie's release.

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James M. Harrison, Party City Holdco Inc. - CEO & Director [48]

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Right. But on the subject of IP, there's a lot of good IP this year outside of Frozen. There's a new Descendants, which should be very strong for the team and young-adult female. There is a movie called UglyDolls which should do very well, also juvenile, and then on the Marvel side, there's...

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Ryan T. Vero, Party City Holdco Inc. - President of Retail [49]

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Avengers.

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James M. Harrison, Party City Holdco Inc. - CEO & Director [50]

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The new Avengers and then there's Toy Story 4, and then there's Aladdin and then there's Lion King. So there's a pretty, pretty robust pipeline from the major studios of IP. And when you couple that with what's going on in the gaming world as well as some of the more tertiary licenses that have a bit of a pop potentially this year, we look at IP really being a nice driver, particularly in Q4. But at the end of the day, from the standpoint of Frozen, it's probably going to be a much, much more significant 2019 event.

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Ryan T. Vero, Party City Holdco Inc. - President of Retail [51]

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2020.

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James M. Harrison, Party City Holdco Inc. - CEO & Director [52]

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2020, I apologize. Thank you.

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Unidentified Analyst, [53]

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And then just lastly, should we expect any franchise repurchases in the next fiscal year?

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James M. Harrison, Party City Holdco Inc. - CEO & Director [54]

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As I said in my remarks, this year is the year we're going to focus on the pay down of debt. And as a result, unless there's an extraordinarily opportunistic opportunity out there, we would not anticipate doing any franchise acquisitions.

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Operator [55]

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Thank you. There are no further questions at this time. This concludes our Q&A session. I will now turn the call back over to our management for closing remarks.

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James M. Harrison, Party City Holdco Inc. - CEO & Director [56]

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Thank you very much, Operator. Once again, everybody, thank you for joining us today. And once again, on behalf of the entire organization, I want to thank Dan for his many contributions over the years and -- over the past 2.5 years and wish him well as he embarks upon a new set of challenges. As always, should you have any questions or wish to reach out to us at any time, please do not hesitate to do so. We're happy to answer any questions you might have and talk about the business. Thank you very much, everybody.

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Operator [57]

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This concludes today's conference call. You have a good day. And thank you for participating.