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American Greetings (AM)

Q3 2013 Earnings Call

December 20, 2012 9:00 am ET

Executives

Gregory M. Steinberg - Director of Investor Relations and Treasurer

Stephen J. Smith - Chief Financial Officer and Senior Vice President

Analysts

Jeffrey S. Stein - Northcoast Research

Paul Simenauer

Sean O'Malley

Owen Douglas

Presentation

Operator

Good day, and welcome to the American Greetings Corporation Third Quarter Fiscal 2013 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Gregory Steinberg. Please go ahead, sir.

Gregory M. Steinberg

Thank you, Kyle. Good morning, everyone, and welcome to our third quarter conference call. Joining me today on the call is Steve Smith, our CFO.

We released our earnings for the third quarter fiscal 2013 this morning. If you do not yet have our third quarter press release, you can find a copy within the Investors section of the American Greetings website at investors.americangreetings.com.

As you may expect, some of our comments today may include statements about projections for the future. Those projections involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. We cannot guarantee the accuracy of any forecasts or estimates, and we do not plan to update any forward-looking statements.

If you'd like more information on our risks involved in forward-looking statements, please see our annual report or our SEC filings, previous earnings releases, as well as our 10-Qs, 10-Ks and annual report, are available on the Investors section of the American Greetings website.

In light of the proposed going-private transaction that was announced at the end of September, today's conference call will have a similar format to last quarter's conference call. Our CFO, Steve Smith, will offer some prepared remarks, which will be followed by a question-and-answer session. We will be limiting prepared remarks to historical results. We are not updating, reaffirming or otherwise addressing full year guidance, and we'll not be discussing the proposed going-private transaction that was previously announced. We will now proceed with comments from Steve, followed by the question-and-answer session. Steve?

Stephen J. Smith

Thanks, Greg. I have 4 components to my prepared remarks today. I will start with comments on how the Clintons transaction impacted our financial results, then share our consolidated results for the quarter, then move to a review of our reported segments, and finally, I will touch on a few key components within our financial statements. We will then open the line for questions.

I would like to first start with comments on how the recent acquisition of certain assets of Clinton Cards is impacting our financial results. As you likely know, during our first fiscal quarter, we acquired the senior secured debt of Clinton Cards and incurred bad debt and other related expenses, as Clinton Cards filed for administration. During the second fiscal quarter, we acquired certain assets from Clinton Cards, which included approximately 400 stores and related overhead as well as the Clinton Cards brand.

Since that time, we've been making progress to improve the business. We are encouraged by the progress made so far. As we discussed last quarter, our strategy to improve the Clintons operations has included reevaluating the overall product offering within the stores, remodeling some of the stores, re-merchandising the card assortment, aggressively renegotiating leases, installing a new computer system and reducing overhead costs. We are encouraged with the progress so far as well as the preliminary results, although we are still in the middle of the turnaround.

Forecasting the performance of a turnaround that is both highly seasonal and where the ultimate number of stores we will eventually operate have not been finalized, is a difficult task. After the business has had a full year of operations, including having operated through the Christmas season where the bulk of the profit is generated, we will have more confidence on our ability to predict Clinton's financial performance, and as a result, our ability to predict the consolidated group.

Let me briefly summarize how Clintons impacted our income statement, both at the consolidated level as well as at the segment level. During the third fiscal quarter, we recognized the net increase in revenue of about $42 million, which is comprised of the Retail Operations segment revenue of $68 million less the eliminations associated with intersegment revenue from our U.K. wholesale business of $26 million.

Clintons negatively impacted our operating income by approximately $16 million during the quarter compared to the prior year due to the combination of the Clinton's segment loss of slightly more than $11 million and the intersegment items of slightly more than $4 million.

In connection with the additional leverage incurred as a result of Clintons, we amended our credit agreement. That amendment was filed today with our 8-K. Within the amendment, we modified the definition for EBITDA to permit certain add-backs for specific nonrecurring expenses related to Clintons. We are in compliance with the financial covenants under our credit agreement.

Switching gears from a review of the several ways Clintons has impacted our quarter to a review of our consolidated performance, let me start with revenues.

Our consolidated third quarter revenue of $507 million increased about $42 million from last year's third quarter of $465 million. This increase benefited from about $1 million of foreign exchange compared to the prior year's third quarter. In addition, scan-based trading favorably impacted revenue by slightly less than $1 million compared to the prior year's third fiscal quarter. So holding aside the impacts from both FX and SBT, revenue was up about $40 million or just over 8%. The revenue increase of $40 million was driven by the acquisition of Clinton Cards, which contributed net incremental revenue of about $42 million period-on-period.

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