Deutsche Bank Leveraged Finance Conference October 2018

Transcription

1 Deutsche Bank Leveraged Finance Conference October 2018

2 Disclaimer Forward Looking Statements Disclaimer Some of the statements in this presentation are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of The Company generally identifies forward-looking statements in this presentation using words like believe, intend, target, expect, estimate, may, should, plan, project, contemplate, anticipate, predict or similar expressions. You can also identify forward-looking statements by discussions of strategy, plans or intentions. These forward-looking statements are based on the Company s expectations, assumptions, estimates and projections about its business and the industry in which it operates as of the date of this presentation. These statements involve known and unknown risks, uncertainties and other factors that may cause the Company s or its industry s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. These risks and uncertainties include: our ability to compete effectively in a competitive industry; fluctuations in commodity prices; our ability to appropriately respond to changing merchandise trends and consumer preferences; successful implementation of our store growth strategy; decreases in our Halloween sales; disruption to the transportation system or increases in transportation costs; product recalls or product liability; economic slowdown affecting consumer spending and general economic conditions; loss or actions of third party vendors and loss of the right to use licensed material; disruptions at our manufacturing facilities; and the additional risks and uncertainties set forth in Risk Factors in the Company s latest Form 10-K and in subsequent reports filed with or furnished to the Securities and Exchange Commission. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, it cannot guarantee future events, outlook, guidance, results, actions, levels of activity, performance or achievements. You are cautioned not to place undue reliance on these forward-looking statements. Except as may be required by any applicable laws, the Company assumes no obligation to publicly update or revise such forward-looking statements, which are made as of the date hereof or the earlier date specified herein, whether as a result of new information, future developments or otherwise. 2

3 Agenda Management James M. Harrison, Chief Executive Officer Daniel J. Sullivan, EVP, Chief Financial Officer Agenda 1 Company History 3 Financial Performance 2 Key Investment Highlights 4 Closing Thoughts 3

4 COMPANY HISTORY

5 COMPANY OVERVIEW World s largest designer, manufacturer and distributor of decorated consumer party products $2.4 billion in worldwide sales 1 / $409 million in Adjusted EBITDA / 17.3% margin Design Manufacturing / Sourcing Distribution / ~200 person design team / Introduce 8,000 new products and 50 new ensembles each year / Proprietary designs and licenses / Directly manufacture metallic and latex balloons; paper plates, cups, napkins and bowls; plastic cups, plates and bowls; piñatas; costumes; gift wrap; gift bags; stickers / Extensive sourcing operations with approximately 560 FTEs in 9 cities across 5 countries throughout Asia / >45,000 SKUs sold into 100 countries / Over 40,000 retail locations including Party City, independent party stores, grocery stores, dollar stores and others / Also sold through white label / B2B and distributed through US and European supply chain that also owns the world s largest retailer of party goods / #1 party goods retailer in North America with approximately 950 locations nationwide, including approximately 100 franchise locations / We believe we are the #1 party goods global e-commerce platform / ~80% of products offered at retail are designed and manufactured and/or sourced internally / A one-stop-shop for all of a consumer s party needs Note: Financials represent 2017, unless otherwise noted. 1 Represents total reported revenues, net of intercompany eliminations. On a gross basis ~$3.0 billion. 5

6 Enhanced Share of Shelf Retail / E-commerce Design / Manufacturing / Wholesale BUILDING A GLOBAL CONSUMER PARTY PRODUCTS BUSINESS Party & Balloon Distribution Vertical Integration Share of Shelf / International Growth Enhanced Manufacturing Capabilities (Acquired 2010) (Acquired 2017) (Founded 1947) M&D Balloons Designware (Acquired 1998) (Acquired 2002) (Acquired 2010) (Acquired 2011) (Acquired 2014) (Acquired 2015) (Acquired 2016) (Acquired 2017) & Beyond (Acquired 2005) Gags & Games (Acquired 2006) Online (Acquired 2007) (Re-launched 2009) (Acquired 2011) (Acquired 2013) Franchise (Various) Independents (Various) / 30+ identified acquisitions across the value chain Franchise Group (Acquired 2007) (Acquired 2006) (Acquired 2013) / Tuck-ins across manufacturing, distribution and retail / Significant manufacturing share of shelf upside 25% 15% 23% Manufacturing share of shelf Retail share of shelf 80% Through the acquisition of Party City in 2005, we transformed our company into a fully vertically integrated business, enhancing our capabilities and fueling significant gross margin gains 6

7 DIVERSIFIED SALES AND PROFIT Our Unique Vertical Model Drives Our Industry Leading Profitability Sales Mix 1 EBITDA Mix (EBITDA margin 17.3%) Metallic Balloons 3% International Consumer Products 10% Verticallyintegrated ~40% Third party Consumer Products ~35% Retail 52% Domestic Consumer Products 35% Retail - Non-vertical ~25% 1 Represents total net sales of each business unit, excluding the effects of intercompany eliminations to reflect stand-alone size and scale of each business. 7

8 RECENT DEVELOPMENTS Expanding our brick and mortar and online Retail businesses Amazon Store Front Pilot Toy City Pop Up Expansion 8

9 INVESTMENT THESIS

10 KEY CREDIT HIGHLIGHTS A B C Clear Global Market Leader in Party Category Powerful Vertically Integrated Model Dominant Omni-Channel Retail Platform / World s largest designer, manufacturer and distributor of decorated consumer party goods / Market defining brand with category leading positions / Broad and deep product offering spans over 45,000 SKUs across all categories¹ / Unique model fuels gross margin accretion and competitive advantage / Further margin expansion opportunities through growth in self-manufactured products and continued enhancement of manufacturing and sourcing capabilities / Drives commercial excellence through (a) in-house design & innovation, (b) portfolio of top tier licenses, (c) product assortment / #1 specialty party goods retailer in North America with approximately 950 locations including franchises / Innovative in-store experience complemented by a differentiated online platform / Continue to improve efficiency and productivity, lower costs and enhance in-store experience for customers D Strong Financial Performance and Free Cash Flow Generation / Have delivered consistent, sustainable topline and profit growth over the last 20+ years / Consistent margin expansion and top-line growth, superior to peers / Exceptional free cash flow generations allows for disciplined debt repayment / Disciplined and balanced approach to capital allocation E Multiple Levers for Disciplined Growth / Grow consumer products business through further party penetration and alternative markets / Strong pipeline of low risk, highly accretive tuck-in acquisitions / Enhanced retail customer experience (store and online) 10 1 Represents SKUs in wholesale business.

11 Consumer Products Specialty Retail 1 Represents comparison of global sales of the #1 vs. #2 player. A WE LEAD AND DEFINE THE PARTY CONSUMER PRODUCTS CATEGORY Party Goods Consumer Technology Athletic Cosmetics Mattresses (Consumer Products) #1 vs. #2 player (1) +4.0x ~1.2x ~1.6x ~2.5x ~1.2x Party Specialty Retail Pet Supplies Sporting Goods Home Improvement Mattresses 11

12 B OUR VERTICAL MODEL A Virtuous Circle of Strength Our vertical model and global scale provide unique competitive advantages: / End to end control of the process provides commercial, route-to-market and economic advantages for the business / Enhanced profitability by capturing substantial portion of the manufacturing-to-retail margin on a growing portion of the products sold in our retail stores Increases speed to market Ensures best products and inventory Cost competitive sourcing Design and innovation capabilities Enhanced control of inflation pressures Enhance design capabilities via retail insights Rapid response to changes in consumer preferences 12

13 B VERTICAL MODEL: DRIVING COMMERCIAL EXCELLENCE In-house Design & Innovation Portfolio of Top Tier Licenses Product Assortment / Speed to market - Vertical integration allows development team to test new products and rapidly respond to changes in consumer preferences / Avg. lead time from concept to delivery of ~10 months / Channel exclusivity on a vast majority of licensed product / 20% of consumer products business is licensed. 5% directto-retail licenses with major specialty suppliers / Deepest product assortment in the market, differentiating us from others / Over 30K SKUs 1 sold in-store and 40K SKUs sold online 1 Includes Seasonal SKUs. 13

14 B VERTICAL MODEL: ROUTE-TO-MARKET Sourcing and Manufacturing Excellence which Fuels our Vertical Model / ~25% of our retail business is manufactured in-house (largely US based), focused primarily on high-volume party essentials, generally manufactured through highly automated processes / Manufacturing and distribution capabilities across 4 continents / China-based sourced product continues to decline as we expand operations / Extensive sourcing operations across 9 offices drive best-in-class sourcing capabilities / 20+ year relationships with many of our key vendors Manufacturing Sourcing Distribution 14

15 B VERTICAL MODEL: ECONOMIC GAINS Multiple Levers for Margin Expansion / Gross margin expansion will continue to be driven through our vertical model / Manufactured SOS will likely double in the next 5 years based largely on leveraging of existing manufacturing assets / Doubles economics will improve as we further drive sourcing savings and focus on product re-engineering / Triples economics strengthen through manufacturing efficiencies and productivity gains Breakdown of Retail Sales Examples Margin implications Singles Singles 20% 20% Candy, greeting cards, helium, foil serving pans Earns retail margin only Doubles 57% Increase of 2x in Manufactur -ing Share of Shelf Doubles 30% Party favors, costumes and wearables, table covers, cutlery Earns wholesale + retail margin Triples 50% Earns manufacturing + wholesale + retail margin Triples 23% Paper plates, cups & napkins, plastic cups, metallic and latex balloons, costumes and piñatas Today Goal (~5 years) 15

16 C DOMINANT RETAIL PLATFORM Trusted Brand with Unmatched In-Store Experience Best Positioned To Win With Customers We Believe We Out Assort Our Competitors Top customer buying factors ,000 (SKUs) / Location / Quality / Assortment / Price / Theme availability Approximately 950 stores nationwide 2 Stringent quality control processes ~30K 4 SKUs in-store / ~40K SKUs online Nobody has more party for less ~400 party goods ensembles <500 <500 Dollar Stores Mass Top Choice To Purchase Party Supplies 3 One-Stop-Shop For All Party Needs 28% 26% 8% quality store choices selection variety lots fun good ideas themes large items stuff find supplies products great shop lot 6% 6% parties choose party prices wide 4% High brand awareness of 78% 5 1 Customer survey of 1,000 participants answering question When deciding where to buy party supplies how important are the following factors in making your decision? 2 Includes franchised locations. 3 Customer survey of 1,000 participants answering question If you had to pick one store to purchase party supplies at, which store would you choose? 4 Includes seasonal SKUs. 5 Based upon survey conducted by Hill Holiday. Source: Company filings, company data, Hill Holiday 16

17 C BECOMING A WORLD CLASS RETAILER Improved In Store Experience and Increased Store Productivity / PartyCity.com redesign / Deploy CRM / Party Planner Program 1 2 / New product focus / Service standards and scorecards / BOPIS experience Sales Profit Customer Retention / Building a winning culture focused on our customer / Talent management / Category management process improvement / Driving accountability 4 3 / Productivity initiatives / Optimized inventory mix by store system implementation / Improved store and seasonal execution 17

18 D CONSISTENT PROFIT GROWTH EBITDA Growth in 19 of the Past 21 Years Adjusted EBITDA ($mm) $38 $40 $46 $57 $55 $59 $67 $71 $72 $72 $122 $152 $186 $190 $231 $275 $292 $321 $362 $380 $390 $409 $ LTM 1Q'18 Long History of Deleveraging ¹ Denotes year of leveraging transaction 3.1x 6.2x 4.8x 5.0x 4.8x 4.4x 3.6x 5.2x 7.5x 4.5x 4.7x 3.8x 3.3x 4.2x 3.4x 6.1x 6.6x 5.7x 4.6x 4.1x 4.3x 4.5x 1.2x ² LTM PF³ Note: See Appendix and SEC filings for reconciliation of Adjusted EBITDA to Net Income. 1 Leverage defined as LTM net debt / Adjusted EBITDA. 2 Opportunistic share repurchase occurred in Increase in leverage primarily driven by seasonal net working capital requirements. Leverage as of Q

19 D STRONG FREE CASH FLOW GENERATION Attractive Cash Characteristics Underpin Healthy Balance Sheet Free Cash Flow ($mm) 1 $342 $301 $308 $284 $260 $ Healthy FCF growth: / Strong business model and multiple levers to generate topline growth fuel sustained free cash flow growth: / Unique vertical model generates gross margin rate accretion / Relentless focus on costs contributes to operating margin growth / Strong cash conversion / Capital Investments managed to deliver solid ROIC and enhance business operations Note: See Appendix and SEC filings for reconciliation of Free Cash Flow to Adjusted EBITDA and Adjusted EBITDA to Net Income. 1 Free Cash Flow defined as Adjusted EBITDA less Capital Expenditures. 19

20 D STRONG FREE CASH FLOW GENERATION Disciplined and Balanced Approach to Capital Allocation Capital Allocation Priorities Capital Allocation Distribution 1 / Disciplined Debt Repayment Last 3 Years ( ) 2 / Investing in Underlying Business and Growth Platform Share Repurchases 25% Debt Repayment 43% 3 / Low Risk / Highly Accretive Acquisitions 4 / Opportunistically Return Value to our Shareholders (Share Repurchases) M&A 11% Capital Expenditures 20% 20

21 E OUR GROWTH PLATFORM Differentiated by Multiple Levers for Sustained Growth Continued Acquisitions Strong pipeline of low risk, highly accretive acquisitions across all our businesses Retail Business Improved shopping experience and enhanced digital assets Broadened CRM capabilities Modest square footage increases GROWTH DRIVERS New Channels of Trade New capabilities and product offerings for wider channels of trade beyond specialty party stores International Growth Deeper penetration in existing markets to continue to fuel double digit growth Personalized Products Capitalizing on growing consumer needs and highly fragmented industry (Print Appeal) 21

22 BUSINESS RESULTS

23 CONSISTENT FINANCIAL PERFORMANCE Sustained Topline and EBITDA Growth Revenue ($mm) $1,872 $1,914 $2,045 $2,271 $2,295 $2,283 $2,372 $2,419 $1,560 $1,487 $1,599 $1,015 $1,247 $193 $210 $235 $306 $326 $345 $386 $403 $399 $ ¹ 2017 LTM 2Q'18 Adjusted EBITDA ($mm) 2 $38 $40 $46 $57 $55 $59 $67 $71 $72 $72 $122 $152 $187 $192 $231 $275 $292 $321 $362 $380 $390 $409 $ LTM 2Q' revenue includes ~$22M of negative FX impact. 2 See SEC filings for reconciliation of Adjusted EBITDA to Net Income. 23

24 CORE FINANCIAL FUNDAMENTALS 1 Multiple Levers for Topline Growth 2 Gross Margin Expansion Qingdao, China Delhi, India Yiwu, China Shantou, China Nanjing, China Hong Kong, China Panyu, China Ho Chi Minh, China Jakarta, Indonesia 3 Accelerated EBITDA Growth 4 Strong Cash Flow Characteristics / Solid topline growth and vertical model expansion / Continuous improvement approach across all aspects of the business / Consistent free cash flow generation business model / Strong free cash flow conversion / Strong cost management discipline across the businesses 24

25 STRONG GROWTH Consistent Growth, with Strong Underlying Performance Revenues ($mm) Total Gross Margin ($mm) 36.1% 37.9% 38.9% 39.7% 40.4% 40.8% 40.9% Adjusted EBITDA ($mm) and Adjusted EBITDA Margin 1 Free Cash Flow ($mm) 1,2 15.3% 15.7% 15.9% 16.6% 17.1% 17.3% 17.2% 1 See Appendix and SEC filings for reconciliation of Free Cash Flow to Adjusted EBITDA and Adjusted EBITDA to Net Income. 2 Free Cash Flow defined as Adjusted EBITDA less Capital Expenditures. 25

26 CLOSING THOUGHTS

27 CLOSING THOUGHTS As the leading manufacturer, wholesaler and retailer in the decorated party goods space, we have unmatched market leadership positions While two-thirds of our revenue is generated from our retail business, we are far more than just a retailer, with unique economic characteristics as a result of our vertically integrated model, unlike many other typical specialty retailers We are on a focused journey to become a world-class, omnichannel retailer, which will only further strengthen our clear market leadership position We will continue to manage this business to deliver consistent, sustainable top and bottom line growth while providing strong free cash flow generation 27