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Russ Berrie & Co., Inc. (RUS)

Q3 2008 Earnings Call

November 11, 2008 10:00 am ET

Executives

Erica Pettit – Financial Dynamics

Bruce G. Crain – President, Chief Executive Officer

Anthony P. Cappiello – Chief Administrative Officer, Interim Chief Financial Officer

Analysts

Arnold Brief – Goldsmith & Harris

Presentation

Operator

Good morning, ladies and gentlemen and welcome to the Russ Berrie and Company conference call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will follow at that time. Any reproduction of this call in whole or in part is not permitted without prior express written authorization of the company. As a reminder, this conference is being recorded.

I would now like to introduce your host for today’s conference, Ms. Erica Pettit of FD.

Erica Pettit

Thank you, Chris. Good morning everyone and welcome to Russ Berrie’s third quarter 2008 conference call. If you have not viewed the press release issued this morning and would like to receive one by email or fax, please call Financial Dynamics at 212-850-5600 and someone will send you one immediately.

As stated in the company’s earnings release, this call is being webcast and can be accessed on the company’s website at www.russberrie.com. The webcast of the call will be archived online shortly after the conference call for 90 days. We will begin the call with comments from management and then we will open up the line for questions.

Before we begin we would like to remind everyone of the cautionary language regarding forward-looking statements contained in the press release. That same language applies to comments made on this morning’s conference call.

Now I’d like to turn the call over to Bruce Crain, Chief Executive Officer and President of Russ Berrie.

Bruce G. Crain

Good morning everybody. Thanks Erica and thanks everybody for joining us. I’ll start with a review of our recent performance then Tony Cappiello, our Chief Administrative Officer and Interim Chief Financial Officer will provide a more detailed discussion of our financial results. Later I’ll come back and briefly discuss our plans going forward.

Let me discuss some general trends that are affecting our businesses before diving into specifics on the I&J area or infant and juvenile business and then our gift business. We delivered consolidated top line growth and profitability during the quarter due to growth in our infant and juvenile segment, despite the extremely volatile and uncertain retailer and consumer environment that we have all been witnessing over the last months.

Our recent acquisitions of LaJobi and CoCaLo collectively performed well and were accretive to our results. Kids Line and Sassy together delivered solid organic growth for the nine months ended September 30, 2008. That said, our gift segment continued to experience sales challenges as we cycled very strong performance from last year driven by Shining Star sales in particular and the weak demand trends that persist in the gift channel.

Our gross margins are under pressure in both segments as they have been impacted by both supplier costs and a consumer environment that is straining retailer price points. Some of these margin adjustments are structural and longer term for us and some we believe are shorter term pressures that can be addressed.

Let me briefly describe a couple of the factors that have continued to impact our margin performance. First, higher cost of goods, particularly in our infant and juvenile business, persisted as raw material costs, labor and freight costs, all remained elevated. All of these are affected by the current state of the Asian supplier market that continues to be under significant costing pressures with many factories going out of business over the last year, although we are fortunate that our principal factory partners are still operating.

This sourcing environment has been further exacerbated by the ongoing unfavorable currency trends as the US dollar and Chinese Yuan exchange rate continues to weaken. Given that we source the vast majority of our products from Asia, all our product development and sourcing teams are regularly in Asia both managing costs and sourcing new programs. Recent discussions with vendors provide us with cautious optimism for managing margins in 2009 as recent tax rebates for Chinese factories have improved and declines in commodities such as oil and cotton have begun to help offset some of the margin pressures. However, ongoing concern that currency and cost uncertainties and the escalating costs of quality assurance and testing are continuing to pressure margins.

Separately, our gross margin in the gift segment was negatively impacted as a result of the mix of products sold, de-leveraging of fixed costs due to lower sales, and an additional inventory reserve that Tony will discuss later.

Now, specifically turning to a few things I wanted to discuss about our infant and juvenile area. First, we believe that the infant and juvenile industry has historically demonstrated that consumers typically cut back in other purchases before pulling back in purchases of most infant and juvenile products. We believe this fundamental has helped insulate our business during the economic downturn, although we have recently entered into unprecedented times that make it difficult to predict how the consumer will react on a go-forward basis.

For example, retailers are bracing for one of the weakest holiday seasons in years and are managing their inventories accordingly. We are seeing this even in every day product areas that are not necessarily typically associated with holiday shopping. To that end, some retailers have pulled back on certain orders, including reducing product inflows at least temporarily. While this has resulted in some sales postponements, our businesses continue to focus on maximizing market share and shelf space.

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