May 9, 20225 min
US listed Party City, which runs ~850 party stores across the US issued a profit warning which saw its stock fall as much as 64% on Monday. The company revealed US$2mm impact in Q1'22 from having to source higher priced helium and a US$12mm impact from freight and port fees. The expected helium impact in Q2'22 is expected to be US$7mm. Although it was able to keep its shops well stocked with helium, unlike in the previous shortage, this came at a steep cost. Its 8.75% bond, due 2026, was down about 10 cents on the dollar to 76.25 cents Monday afternoon, according to data compiled by Bloomberg. Party City had restructured its debt last February with a $750 million bond exchange, after battling store closures and fewer parties due to the pandemic.
Call transcript
Second, helium costs. As a reminder, we have shared previously that we have significantly diversified our helium supplier base and entered into multiple well partnerships, as well as long-term supply agreements that have significantly improved the company's ability to source helium. That said, there have been a
number of factors that have combined to tighten the global helium market. Let me highlight a couple of these developments for those who are not as familiar with the helium market. First, in the U.S., the plant managed by the Bureau of Land Management, which produces 8% of global helium supply has experienced operational issues since July 2021 and a complete shutdown since January 2022. Many of these safety concerns and repairs have been addressed and plant operations could resume as early as June.
Second, in Qatar, where approximately 35% of global helium supply is produced, 2 of 4 plants were taken off-line in March for scheduled maintenance. This maintenance has been completed and the plants resumed operations in April.
Lastly, a large Gazprom plant in Siberia experienced a plant explosion, which has taken the facility offline. Although Russia only produced 3% of the global helium supply in 2021, this facility was expected to contribute a significant amount of global helium in the coming years and provide incremental supply to the Chinese market. As a result of these factors, all major helium suppliers have instituted allocations, which have resulted in a need for us to tap the spot market to augment our near-term helium needs.
Fortunately, the work we've been doing to diversify our supply base has allowed us to establish strong relationships with many of the independent helium suppliers throughout North America. The good news is, we've secured helium to meet our customers' needs, which is important ahead of our key graduation season.
As a point of reference, today, 97% of our fleet is in stock with helium versus the 2018, 2019 time frame when approximately 1/3 of our fleet was without helium at any given time. However, this volume is coming at higher costs, which is impacting gross margins. In Q1, this impact was approximately $2 million to gross profit. While we started to see the impact in Q1, the second quarter will have the largest impact for the year given the timing of the spot purchases, as well as the overall level of helium usage in the quarter.
In order to be well positioned to meet expected robust customer demand for helium balloons in the graduation season, we've made purchases on the spot market at higher rates than we had originally contracted and budgeted. Therefore, we expect the second quarter gross profit helium related headwind of approximately $7 million.
I'd start by saying that the circumstances of this helium shortage environment is very different than it was in 2018 and '19. And back in that time period, we had over
90% of our supply coming from one supplier. And now we've significantly diversified that and as we've talked about over the past, including our own wells. The circumstances that we described in our prepared remarks, we're just a compounding set of elements that really forced our diverse supplier base to go on
allocation. And consequently, as we worked with them, we really tried to diversify our supply across the country. The good news is, we've been able to keep our stores in stock. Our main pressure point for helium is in the second quarter in grad season. That is our peak season. And so, as these unexpected pressures suddenly came online, we immediately evolved to ensuring that between our contracts with suppliers, which were on allocation, our own wells and then what we needed
to quickly purchase in the spot market to ensure helium for Halloween did add cost to the equation. Our priority has been to ensure that we service our customers to the level that we need to, to meet the balloon demand. In the second half, we obviously, we continue to do decent balloon business month-to-month, but graduation season is the peak. And so, that's where we expect the most pressure as we outlined.
So probably a couple of answers to that. First, in terms of our contracts, for the contracts, the vast majority of our contracted volume with distributors is going through allocation at this point. Allocation is impacting the quantity of helium, but not the price of helium from those vendors. So we are able to maintain price, where price comes into it for us is when we can't get the quantity or where we couldn't
get the quantity that we wanted to have to be prepared for graduation season. So, in those cases, we did go out to the spot market to buy additional helium, which, given the shortage of helium that it was at a premium. Overall, though, to Brad's earlier point, we feel like graduation season is, without a doubt, the peak of balloon volume during the year, and we've set ourselves up to be in stock in our stores and to be able to service customers during that important season and sets us up well for the rest of the year.
It's really hard to speculate on future spot prices. Our anticipation is that, we are like-minded in that the BLM coming back online will certainly add supply and reduce any need. We do not see spot purchases being required beyond Q2. When we look at what our expected supply is, even in a little bit of a diminished capacity for the back half of the year. So like we said, the pressure point is really Q2 and other things like BLM should take some pressure off.
So the helium -- when we say 97%, we've had a handful of stores be out of helium over the past few weeks, and it's very spotty. And most of that is not actually driven by a helium shortage. It's actually driven more by logistics and getting helium to the right places. It's obviously a fairly intricate logistics network. And sometimes you just can't get it to the stores on a timely basis. Those lasted a few weeks. Those are in the past. Certainly, they don't have -- it's a few days in a few stores. And so, measuring the impact of any lost sales is -- would be very challenging. But as of now, we don't have stores with that we're anticipating in the near term, having those same challenges based on the purchases we've made.
Another big component of our supply is Qatar. That maintenance has been completed, and those plants have resumed operations. And so, our supply actually comes into our distributors from a number of places throughout the world. They're sourcing everywhere. And so, we're focused a little bit on where geographically their
supplies are coming from, but also extraordinarily focused on ensuring between those suppliers and our own wells that we're in the best shape we could possibly be in.